Trader’s Narrative

Money market asset levels fluctuate much less than their equity counterparts. The general trend for cash holdings is to increase steadily every year. There are some cyclical effects for bear and bull markets. As people become fearful in the face of a bear market, they horde money and as the become convinced they are losing money by not being invested in a bull market, they reduce their cash holdings.

This bear market has given us a lot of unprecedented market situations. We are now seeing a rare exception to the norm of equity fund assets dwarfing money market assets. This has been caused by a double whammy. As the stock market has been pummeled mercilessly, losing 60% of its value since late 2007, the asset value of equity funds has shrunk. And on the other side of things, retail and institutional investors consistently raised their cash assets. In September 2008 I pointed out that there was an unmistakable stampede towards cash as retail investors hoarded cash. Not surprisingly then, in November 2008, we saw a rare occurrence: more assets sitting in money market funds than in equity mutual funds:

Source: Bloomberg Chart of the Day

The last time this happened was 16 years ago, in September 1992. The data for April isn’t available yet but I’d bet it shows money market fund assets almost equal to equity fund assets. Not because people have put the cash to work but because the market has been able to hang on to gains and thereby increased the value of the equity assets.

But as Jason Goepfert of SentimenTrader points out, this is not an automatic buy signal for the market: A Major Buy Signal! Well, Maybe… All we can definitively say is that there is a massive load of cash just sitting on the side, waiting.

A build up of cash is normal in a bear market but before we can transition to a bull market it needs to be put to work. As people become convinced that the worst is behind us, they start to take more risk and begin to put their cash into the market. So unfortunately, just noticing a massive pile of cash doesn’t really help us unless we can somehow pinpoint when and with what intensity this billowing mass of liquidity will start to be invested in the stock market.

But to give you an idea of the sheer monstrosity of the potential tsunami of cash, consider this: it currently represents 50% of S&P 500 total capitalization. Needless to say, that is jaw dropping. As it is put to work, even in a trickle, it will put an impregnable floor on almost all equity indices and then drive prices higher. When that may be, can not be determined by this metric itself but by other technical, monetary and sentiment measures.

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