Sidelined Cash: Fuel for the Fire

Investor cash on the sidelines could serve as a source of funds for additional stock purchases and a continued move higher in the market averages. As the below chart shows, cash levels remain higher than the 27% reached during the 2001-2002 recession and far above the 16% historical average. (Click to enlarge)

From Disciplined Approach to Investing

If one includes ultra short and short term bond fund investments, potential liquidity that could find its way into stocks is significant. In short, investors do not believe this rally is sustainable and that is music to a contrarian's ears.

Source: Still High Cash Levels May Provide Further Support For Stocks (PDF)
Fidelity's Market Analysis, Research and Education
October 22, 2009

Comments

[Archman Inv...:]

I hope all that "cash" does come in.

It will 100% prove my point that average "investors" are morons.
Instead of buying stocks when the S&P 500 was at 700, they wait until the market is up 70%, Cramer touting a new book, and CNBC telling people they "have" to buy or miss it.

Seeing as the majority of Americans are completely clueless that this is nothing more than a FED liquidity driven stock market on low volume, they will once again get destroyed when the party ends.

This party will keep going as long as the FED is determined to mortgage away the next 3 generations of this country's net worth to support an economy where its citizens are still 122% in debt up to their eyeballs.

Nov 11 06:05 AM

[dingding:]

That's why they call it a sucker's rally.
The game plan is to pop up the market until all the managers who are underweight are forced to buy.

The longer the party lasts, the worse the hangover.

Nov 11 06:34 AM

[stockratease:]

just to remind you money markets are safe equity markets are risky.
Net wealth of US households fell from 22 trillion in Oct 2007 to around 12 trillion in March 2009 in what was quite obviously the biggest 'dash for cash' in human history.
Almost everybody who was invested took some sort of a hit with some people suffering a lot more than others.
A good chunk of these people will have been baby boomers and or retirees. For these people replacing lost capital is difficult or even impossible. So it is quite understandable that these people will become more risk averse, perhaps irrationally so for some time.
In view of the incredible shock that a lot of investors have had over the past 18 months I would expect money market levels to stay higher than normal.
Whilst the old adage 'one bitten twice shy' doesn't seem to be having much affect on recapitalized bankers it is apparently having an affect on the saner part of the population, namely people who have worked hard all their lives and don't want to see their remaining pot go up in smoke.

Nov 11 06:37 AM

[fjpenney:]

If you look at the chart for IWM (iShares Russell 2000), as the market rallied over the past six days the volume has steadily declined. This is hardly evidence which would persuade one that the cash on the sidelines is ready to move back into US equity markets.

Nov 11 06:44 AM

[buyitcheap:]

Baloney! Pipe dream! That money on the side is being held in the event of a layoff and to payoff credit cards. (Investors tend to be a sort that care about personal and corporate balance sheets.) 98 cents tomorrow for adollar today in a money market makes a hell of a lot more sense to me than 60 cents in an index fund were another correction to come in, and given the pathetic volumes, it wouldn't take much.

Nov 11 07:34 AM

[AxIt:]

Very interesting. I disagree with many of the comments above: the graph actually shows that money is coming in. Cash % went down roughly from 48% to 33%, a decrease of about 15%.
To go down to the normal 16% level, there should be an additional 17% decrease.
To me, this means that we are about halfway through the rally.

Nov 11 08:19 AM

[Archman Inv...:]

They have a term for that: It's called "dumb money."
Smart money buys stocks when nobody wants them. Then once they have huge gains they say, "Here, take mine."
That is exactly what I am doing.
I still have longs on, but I am laughing all the way to the bank watching people only now buying stocks, after a 70% move.
Like I said before: It is a Fed liquidity driven rally. You cannot fight the Fed, however, since there is no real economic recovery going on here, once the Fed is forced to withdraw all that cash, its bye bye stock market.
(And probably taking a few million Americans net worth down the toilet as well- hey but don't worry everyone, Cramer will write yet another book called "Getting back to even again and again")


On Nov 11 08:19 AM AxIt wrote:

> Very interesting. I disagree with many of the comments above: the
> graph actually shows that money is coming in. Cash % went down roughly
> from 48% to 33%, a decrease of about 15%.
> To go down to the normal 16% level, there should be an additional
> 17% decrease.
> To me, this means that we are about halfway through the rally.

Nov 11 08:36 AM

[bartpr:]

why would anyone think that the small investor who has lost all his home equity and a chink of 401k retirement be ready to do it all over again. common sense say it will not happen. leave it to the next generation, who will inherit all the debt sins of the past.

Nov 11 08:53 AM

[Fin de siecle:]

Just to point out that the % numbers you are looking at are in the form of a ratio. If equity market cap was 100 in March, money market funds were 48. Since then the market is up 56% so market cap is now 156, and cash funds are now 32% of 156 = 49. No change from March. Cash fund levels havent changed- equity prices have simply been marked much higher.


On Nov 11 08:19 AM AxIt wrote:

> Very interesting. I disagree with many of the comments above: the
> graph actually shows that money is coming in. Cash % went down roughly
> from 48% to 33%, a decrease of about 15%.
> To go down to the normal 16% level, there should be an additional
> 17% decrease.
> To me, this means that we are about halfway through the rally.

Nov 11 09:20 AM

[tripleblack:]

Correct. Ratios can be tricky...

Of course, lots of folks insist on looking for the comfort of "historic relationships".

Guys, we need to get over it. We've seen that "history" Change, to borrow a bumper sticker. Any time we trot out the old normal and compare it to the new craziness, its just going to remind us that the pundits were really never that great at predicting the future, and now that their crystal ball's satellite has smacked into the moon, the situation has not improved.


On Nov 11 09:20 AM Fin de siecle wrote:

> Just to point out that the % numbers you are looking at are in the
> form of a ratio. If equity market cap was 100 in March, money market
> funds were 48. Since then the market is up 56% so market cap is now
> 156, and cash funds are now 32% of 156 = 49. No change from March.
> Cash fund levels havent changed- equity prices have simply been marked
> much higher.

Nov 11 09:36 AM

[kashirin:]

Money on sidelines are completely wrong statement by those who don't have any understanding

try to think - if money on sidelines come to stock market do they disappear? no they just have new owner who puts them on sidelines again

money are always on sidelines

Nov 11 09:41 AM

[buoy:]

Lots of retiring boomers may have other plans for their money

Nov 11 10:18 AM

[bigsneak:]

Most of the money market funds that are parked are actually held by institutions and I have a good feeling that a lot of the money is obligated to stay there (substantial future write-offs, repos with the fed, etc) Individual money market funds are actually at substantially lower levels. I just read a UBS report on this. Furthermore, MMF's are mostly invested in Treasuries. What would happen to yields when those institutions start withdrawing?

Nov 11 10:32 AM

[Snitzer:]

The money on the sidelines concept could be naught but somebody out playing with spreadsheets and charts, with no real substance. Big chunks of money got blown away, disappearing into the abyss of stock market oblivion, and that cash ain't cash anymore. The only money on the sidelines could be nothing but a lot of down on their luck people who think that now is maybe the time to invest a few buck, in hopes of a modest recovery sometime in the next year or so. The bad news is that if you weren't in by May or June your dreams of substantial gains may have to be put off for a few years or so.

Nov 11 10:52 AM

[AxIt:]

Correct. So the consideration has to be reversed: sideline moneys being constant (48), capitalization must increase quite a lot for the ratio to reach historical levels (16%). Following your example it should increase to 300, three times your 100 base of march. Either way normalcy requires still a big inflow of capitals in the market. If hystory is worth something (which may be not the case, as pointed out already).

On Nov 11 09:20 AM Fin de siecle wrote:

> Just to point out that the % numbers you are looking at are in the
> form of a ratio. If equity market cap was 100 in March, money market
> funds were 48. Since then the market is up 56% so market cap is now
> 156, and cash funds are now 32% of 156 = 49. No change from March.
> Cash fund levels havent changed- equity prices have simply been marked
> much higher.

Nov 11 11:10 AM

[dlsamg:]

Anyone who says "money on the sidelines" is an idiot and should be ignored. John Hussman has great articles on disproving the mondy on the sidelines fallacy.

Nov 11 11:10 AM

[dlsamg:]

Anyone who try's to make the "money on the sidelines" case is an idiot and should be ignored as a Permabull. John Hussman totally refutes this common fallacy used to pump up the bullish mantra. Using cash as a % of market cap is a new twist on finding any relationship that will make their case. How about cash as a % of apples and pencils sold on NY streets? I'm sure someone used that during the Great Depression.

Nov 11 11:17 AM

[bobbybutte:]

Dlsamg and John hussman are DEAD wrong denying money on the sidelines karen Finerman who is worth 100 million dollars and manages a hedge fund talks about money on the sidelines

Of course she is ahedge fund manager and knows other hedge fund managers if Hussman is so smart why is Finerman so rich?

Nov 11 11:20 AM

[dlsamg:]

Praytell where does this new money come from if I sell you $1000 worth of stocks you take $1000 out of your bank and I put that same $1000 into my bank. How much more is on the sidelines? Now if the Fed is buying stocks with new printed money that is another story. Or if people are borrowing newly created money to buy stocks. It's a silly argument and logical fallacy (appeal to experts) to say it must be correct because someone who made some money believes it. I could show you people richer who don't.

Nov 11 11:35 AM

[JeffDB:]

On Nov 11 06:37 AM stockratease wrote:

> just to remind you money markets are safe -- equity markets are risky.
...
Whilst the old adage 'one bitten twice shy' doesn't seem to be having much affect on recapitalized bankers it is apparently having an affect on the saner part of the population, namely people who have worked hard all their lives and don't want to see their remaining pot go up in smoke. >
--------
But money markets aren't necessarily all that safe either. Even if they never "break the dollar" again, the value of those dollars are still at risk. By some calculations the dollar has dropped some 15% from earlier highs in the year and many economists expect that to be a long term trend.

Dollars themselves have no intrinsic value. They are totally dependent upon the world's "full faith and credit of the U.S. government" and many are beginning to question the competency of that government given some of its recent actions and the fiascoes that seem to follow one after another.

If inflation takes off, those holding a lot of cash may have once again been left "holding the bag".

Nov 11 12:39 PM

[Jason Tillberg:]

How much consumer and mortgage debt is on the sidelines?

How much business debt is on the sidelines?

How much government debt is on the sidelines?

Americans are deleverageing. Cashing out their 401k's and blowing through their savings. That cash on the sidelines is going to food and energy and some of it will go to paying off debt too.

Nov 11 08:27 PM

[EconoMike:]

Mr. Archman said this back in May: "From where I sit here, the market is more than fairly valued here based on all news and earnings we have seen over the past few months." It sounds like he may have missed this year's rally, and now can't bear to see the market go any higher. Out of curiosity Mr. Archman, what percentage of your investments were in stocks back in May?


On Nov 11 08:36 AM Archman Investor wrote:

> They have a term for that: It's called "dumb money."
> Smart money buys stocks when nobody wants them. Then once they have
> huge gains they say, "Here, take mine."
> That is exactly what I am doing.
> I still have longs on, but I am laughing all the way to the bank
> watching people only now buying stocks, after a 70% move.
> Like I said before: It is a Fed liquidity driven rally. You cannot
> fight the Fed, however, since there is no real economic recovery
> going on here, once the Fed is forced to withdraw all that cash,
> its bye bye stock market.
> (And probably taking a few million Americans net worth down the toilet
> as well- hey but don't worry everyone, Cramer will write yet another
> book called "Getting back to even again and again")

Nov 20 05:12 AM