Money Market Cash Levels: Signals of a Market Bottom?

by: David Templeton October 08, 2008    

David I. Templeton

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The chart below notes money market cash as a percentage of all mutual fund assets is at elevated levels. The data is through June and I have no doubt cash levels are at even higher levels today.

(click chart for larger image)

cash levels, stock market, bear market headlines. January 1998 - June 2008

Fidelity's Market Analysis, Research and Education Group notes:

  • This flight to safer investments recalls similar investor behavior in 2001-02, when a bear market coincided with sharp increases in flows to money market funds.
  • For example, in October 2002, money fund assets stood near an all-time peak of nearly 35% of all mutual fund assets (reached in January 2003). This cash surge coincided with the low in the S&P 500 and a spike in “bear” headlines.
  • Although a new bull market began in October ‘02, investors kept an above average level of cash until February ‘04 — meaning in the aggregate, investors overallocated to cash during a 15-month period when stocks rose more than 30%.
  • As a result, some investors who kept long-term capital tied up in cash likely missed out on considerable gains.

According to Fidelity, the bottom line is to stay invested if your cash levels are at acceptable levels:

  • Historically, investors have increased cash positions during bear markets but have been slow to reallocate to stocks. Sudden corrections  — and sudden rallies — have been a normal part of the stock market over time, and attempting to move in and out of it can be a costly endeavor.

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This article has 5 comments:

  •  
    Oct 09 09:58 AM
    I sure hope you are correct !!
    Reply | Link to Comment
  •  
    Oct 09 11:15 AM
    This is incredibly accurate. When the market rebounds, it turns sharply and investors who are overly cautious and stay in cash miss out on a great chunk of the correction...Happens to all of us unfortunately. (except for Buffet!)
    Reply | Link to Comment
  •  
    Oct 09 03:01 PM
    Anybody who does not accumulate a position in good companies at this time is losing out on a golden opportunity. Buy Low, Sell High as Stocks are way oversold,
    My favorites are in the gaming sector, LVS, WYNN, MGM, BOYD. example- LVS came out at 45.00 a share in 2004, Sheldon Adelson, the founder is one of the wealties men in the world. He owns 70% of the company and the company is profitable. The company opened the largest casino in the world in Macau and is going to open another casino in Singapore in 2010. Adelson is negotiating with India to open another casino. Similar stories are available on Wynn, MGM, and Boyd also. These companies are so rediculously low in price that I wish I had the money to buy a hugh block, say 1% in each of them.
    Daniel Kowkabany
    Reply | Link to Comment
  •  
    Oct 09 08:38 PM
    If you Google this string of words

    money market assets percentage of fund assets

    you'll find articles that indicate there are $3.46 trillion in mutual funds and $1.26 trillion in money market funds. The ratio is 36.4%.

    Someone may want to comment on whether the money market funds are included in the mutual fund assets or not in either the above graph or in the articles found.
    Reply | Link to Comment
  •  
    Oct 11 11:11 PM
    haydete...money market assets are tracked separately from mutual fund assets. Data on this breakdown can be found at the Investment Company Institute's website. www.ici.org/stats/late...
    Reply | Link to Comment
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