Money Market Cash Levels: Signals of a Market Bottom?

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)

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.

Comments

[Jimbo:]

I sure hope you are correct !!

2008 Oct 09 09:58 AM

[Indi:]

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!)

2008 Oct 09 11:15 AM

[haydete:]

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.

2008 Oct 09 08:38 PM

[David I. Te...:]

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...

2008 Oct 11 11:11 PM