Mutual Fund Cash Levels Are Good Predictor Of Stock Market

When mutual fund managers are very positive on the market, historically they have kept lower levels of cash on hand in their portfolios. Watching these levels has been a very good predictor of where the stock market might be heading. Consider these statistics that date back to 1961.

In 1971, these cash levels went as low as 4% and a -9% decline followed.
In 1972, these cash levels went as low as 3.9% and a -42% decline followed.

Throughout the 60’s, mutual funds held on average 5% to 6% of their portfolios in cash. When the cash levels dropped below 4%, it was a high risk signal and market declines of some sort followed.

Then the cash levels went back up to the average of 8% to 10% again for a very long time until April ‘98. At that point they went back under 5% for the first time in 21 years. Following that dip down to 4.8% of cash, the market dropped -19%.

Then between 1998 and 2000, the cash levels stayed in the mid to upper 4% ranges. March 2000, we saw the first dip down to 4% cash level in almost 30 years. Of course, that occurred at the top of the great bull market run that led to a -47% decline in the stock market.

In September 2005, we set another record low in cash levels of 3.8%. That led to a mild decline of -5.2%.

In March ‘07, we set a new record of 3.7%. Following that record low the stock market dropped close to 10%.

So where do we stand today? It was reported that we are now at a record low of 3.6%.

Now let’s talk about indicators for a moment. Indicators by themselves can offer some predictive value. A group of indicators signaling everything at once is a big red flag that something is really wrong in the stock markets. Unfortunately, this latest reading on mutual fund cash levels is one of many that is signaling risk at the same time.

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