Mutual Funds Cash Levels

When a few people email the same question, it makes me wonder what the basis of the story might be.

Yesterday, several emailers noted that Merrill Lynch reported Mutual Funds have the highest cash position ever.  While it is true that Mutual Fund Mangers have been rather bearish as of late, its not reflected in their cash levels.

Have a look at this 10 year chart:
click for larger graph


Source: Market Gauge

The stock market needs cash to fuel a rally — and this shows the cash level at about 4.5% — hardly a bullish amount of uninvested dollars.

The 2nd chart goes back to 1968, and attempts to correlate Mutual Fund lows with Market tops.

Note that we haven’t seen a 10% level in mutual fund cash since
1990. Its part of the reason why I don’t buy the thesis that sentiment
is so negative that we are about to start a multi decade Bull run.

S&P500 versus Mutual Fund Cash

Click for larger chart

Source: RoyAshworth


Ashworth notes that the "June 2006 level was 4.2% compared to 4.2% in May 2006. Stock funds posted an outflow of $8.40 billion in June, compared with an inflow of $3.16 billion in May. The current situation is starting to look like the 1972-73 period where cash levels stayed in the 4 -5% level as prices moved higher before the severe decline in 1973-74."

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