Monday, March 23, 2009

Cash on the Sidelines Headed Back to Stocks?

Two months ago, in Chart of the Week: Change of Trends in Cash Holdings? I posted a chart based on money market mutual fund cash levels as calculated by the Investment Company Institute’s (ICI) that generated a considerable amount of discussion when I concluded that the chart may be pointing to a topping trend for cash on the sidelines.

Fast forward to the present and as the updated version of the same chart shows, the mid-January drop in money market mutual fund cash levels turns out to indeed have been the beginning of a change in trend, at least according to the ICI data.

In fact, last week’s data, which cuts off on Wednesday, shows the largest drop in money market mutual fund cash levels in over six months.

With rates on money markets and bonds both headed lower, I would not be surprised to see more money flowing back into stocks for the simple reason that alternative investments have become less attractive.

[source: Investment Company Institute, VIX and More]

7 comments:

Anonymous said...

Bill, Tks... You don't get enough credit for running a clean blog here.

Eric said...

The market was up 6-7% across the board today. What will happen to the VIX when we have a massive short squeeze (I assume a large chunk of the momentum today, but there has to be more to go), money flowing into stocks from money markets, and a Gold bubble bursting (look at GLD:USO and tell me you don't like the Short Gold, Long Oil pairs trade).
I think we could see VIX at 33 by May/Jun, before another reversal.

Pankaj said...

Bill,

I remember you had a post called "Stealth bottom". I think we might have witnessed that on March 9th. What do you say? Also, how do you explain the action in VIX today with a 500 point rally and VIX barely moved.

Cheers,
Pankaj

Douglas said...

Bill

I think you had an earlier post where someone says that a retreating VIX is not bullish for stocks unless the 30 Day RSI on the S&P 500 is above 50. Well, I think that the 30 day RSI went above 50 for the first time in a while after yesterday.

However, the 30 day RSI was above 50 in May 2008 and we all know what happened next...

Douglas

Anonymous said...

Where does this new money come from? If someone sells their stocks to go to cash then someone else had to buy that stock!!! THERE IS NO NET CHANGE. Cash on the sidelines is a Myth! New money only comes in for New Issues and from excess Income...both of which are slow right now. NO NEW MONEY, same old money just buying cheap stocks.

Thanks

Phil R said...

I was just about to post a comment that says the same thing as what Anonymous just said.

There is no such thing as cash on the sidelines. When someone sells a stock, someone else buys it. It's really annoying to hear people say otherwise...

Anonymous said...

Lets say there is a carpet auction in a hotel room. Lots of people walking around the hotel with cash in their pockets.Only two dispririted people in the auction room - very low prices being offered. Do you think the prices for carpets at the auction would be higher or lower if a 100 people walk into the auction room - after a few drinks under their belt? After all the amount of cash in aggregate(for all the folks in the hotel) has not changed!

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