Cash Building

An interesting indicator that I have watched over the years is how much cash is building on the sidelines.  This is a contrarian indicator that can sometimes tell you eventually which way the market will go.  Some will look at hedge funds, some will look at mutual fund money market balances and/or inflows.  I watch all of them and add it to my formula to decide whether I should be allocated to stocks or not.  Before I show you a picture, I want to warn you that of the indicators I watch, this one is not very timely.  In other words, cash can build up on the sidelines for several months or years before the market can turn.

Today, a Merrill Lynch analyst came out with a picture via Bloomberg that shows the amount of cash that hedge funds have on the sidelines.  It’s almost $156 billion.  That’s a huge number.  In fact, she states that it’s almost enough to acquire the 5 smallest Dow Jones companies.  Wow!

Source:  Bloomberg

The chart above goes back to about 1991 and shows the amount of cash through today.  You can see the spike since late last year.  Obviously, that money has come out of the market as prices have fallen and into cash.  I’ll warn you that cash on the sidelines built in 2000 & 2001 but as you know the market didn’t start going up until really March 2003.  Nevertheless, it’s an important figure to watch and to take into consideration.  I’ll also warn you that this money doesn’t have to come back into American stocks.  It can go into private equity, bonds, international stocks, etc.  But, let’s keep an eye on this going forward. 


I’ve been hearing rumblings that oil has been dropping since Friday partly because of the selection by John McCain of his running mate Sarah Palin.  With the weak bump in the polls the DNC got last week after their convention and the bump the RNC will get from their convention plus this pick, perhaps the odds of the Republicans staying in the White House are going up.  That may mean more drilling, especially with Palin on the ticket.  I’m not sure if that’s why oil is going down or not, but it could have contributed.  I know for a fact that traders were watching the 200-day moving average as support for oil.  When it fell below, it fell hard.  I think eventually lower prices (perhaps $100 per barrel) will bring back global demand.


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