Sunday, February 6, 2011

One More Canary

The leader groups in the market have been telegraphing the turns in the S&P 500 pretty well the last few years, and recently they have all held hands and sung a new song. I've written an article all about this What Tunes Are The Market Canaries Singing These Days ? over at Seeking Alpha, but since it's an exclusive to them, I can't post it here. I was remiss, however, in not pointing out one of the biggest, baddest canaries of them all, which I will do here.

This bad ass canary is the tracking of the cash levels of mutual funds. It is a contrary indicator because it depends on funds being the market, and if they are all in, the supply of dry powder for further upside gets pretty low. And for the last 40 years, that's about the way it has played out:

This history clearly shows the market was crusin' for a brusin' any time the cash level got down anywhere near 4%. This happened in 1972 in front of the '73/'74 beating, in early 2000 in front of the '00/'01/'02 beating, and in 2007 just in front of the '08/'09 beating. Well, Mister Market may want to brace for another assault and battery, because we are at around 3.5% now.

It should be noted that economic cycles are also very important, and each of these dips to below 4% happened in front of recessions. The only dip that didn't was the one in 1976, and the market's decline wasn't very bad after this cash level drop to around 4.5%. We currently are in an economic recovery cycle, so if we can avoid another recession, a market drop may not be so terrible.

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