Market Outlook: Crash On The Sidelines
Summary
- The popular theory is that there is tons of cash sitting on the sidelines.
- The reality is a bit different.
- We also go over the crash happening on the sidelines, away from the main view.
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There is a popular theme going around. One that suggests there is plenty of "cash on the sidelines". That has given investors the hope that markets can remain buoyant forever. In the article today, we go over quickly as to why it is a fallacy. We also show you a picture of a "crash on the sidelines".
Cash On The Sidelines
Investors today get bombarded with a lot of different headlines. None, perhaps gets more attention than this fallacy that we have record amounts of cash sitting and just waiting to get in to the markets. The common pictures shown for supporting such thesis often include a picture depicting the sorry returns being earned in bond markets. Trillions for example are earning negative returns in bond markets.
Source: LPL
Surely, they will move into the stock market?
There are two issues with this logic. The first is that if that $16 trillion wanted to sell their bonds and move to the stock market, well, somebody needs to buy that $16 trillion of bonds. Their exit requires a sale and a purchase transaction and at the end of that there will still be the same amount (assuming price remains unchanged) of bonds. Not only do these bonds yielding low returns need to exist, they actually continue to expand as governments issue record amounts of debt. By that logic the "cash on the sidelines" will continue growing every single day, regardless of what happens in the stock market.
To show you how often people lose sight of this simple logic, we are going to show you that you can always find phrases alluding to "cash on the sidelines" right before major bear markets.
"The percentage of cash on the sidelines as a percentage of market value is the highest it's ever been," said Richard E. Cripps, chief market strategist for Stifel Nicolaus. "We have an acute level of risk aversion by investors -- understandably so."
Source: NJ April 21, 2008
"There is a mind boggling amount of cash on the sidelines that at some point will flood the market," said Robert Loest, portfolio manager at Integrity Funds, "When that happens, it's Katie bar the door."
Source: CNN May 1, 2008
Some $33 billion has flowed into money market funds since the beginning of August, more than twice the monthly average through July of this year, according to IBC Financial Data Inc. in Ashland, Mass. "There's a huge amount of cash on the sidelines," said Peter Crane, managing editor of IBC's Money Fund Report. "There's some mythology surrounding the crash of 1987, coupled with October's track record of having some drops in recent years."
Abundant pessimism and piles of cash could mean good news for stocks. The best time to buy is when the market bottoms; the more cash pours in, the bigger the jump. And while October can be a month of crashes, it has also been the month of quick rebounds, as investors rushed to buy stocks at discounts.
Source: Deseret September 18, 1999
"There was plenty of cash on the sidelines. As soon as it became evident that the correction in the Nasdaq was over this morning, investors put money to work in a more broader array of industries, said Bob Wahlberg, chief equity analyst at Briefing.
Source: CNN January 7, 2000
It must be glaringly apparent that whatever the timeframe, you will always find someone saying "record amounts of cash on the sidelines".
The second issue with this logic is that a rapid rerating of price or yield on this debt can actually make the stock market more jittery. For example, if all these bond holders decided to exit at once and try and run to the stock market, yields on bonds would spike and directly reduce the relative appeal of the stock market.
Crash On The Sidelines
While we don't believe there is any cash on the sidelines, we are seeing signs of a crash that is hidden from main view. This consists of strong stocks that have beaten earnings estimates by a country mile and still got clobbered. NVIDIA Corporation (NVDA) is the first one we want to bring up.
Source: Seeking Alpha
The EPS and revenue beat was so strong that bulls must have expected a rise to $700/share shortly. Instead, the stock fell 15% from its after-market high of $600/share.
Zoom Communications (ZM) did something similar.
Source: Seeking Alpha
The stock got bought in the afterhours and then smashed during the regular trading session. On last check it was off 25% from its after-hours session high of $460/share. Now you may argue that these stocks are cheap, and that is certainly true if you ignore every sane valuation metric known to man.
Source: QF Research
But we think the more likely case is that when these awesome parabolas "break", they are next to impossible to repair. Watch the crash on the sidelines as the leaders of 2020 roll over.
Conclusion
Cash on the sidelines is the ultimate fallacy quote to draw you in. It is the soothing tone to tell you "yeah but there is a greater fool out there." Unfortunately, that quote means absolutely nothing in isolation. Instead of paying attention to the cash on the sidelines, investors should focus on leaderboard rolling over. From semiconductors to work from home to renewable energy, stocks that led with pride are now rolling over. Despite that selloff, over $6 trillion is still sitting in train-wreck, money-losing firms currently.
Source: Kailash Capital
The exit of that "cash", is what will give a far more entertaining display than anything "cash on the sidelines" can provide.
Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.
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Comments (208)
I don't use Bollinger bands, but looking at the 2012 Reference, AAPL had the exact same divergent ( MACD / RSI ) setup on daily charts as are shown in today's chart. Timewise in the move both have broken Trend - and hovering above 200 day MA2012 Oct 24th
is about equal to
2021 Friday March 3rd
in the move technically.Both Daily divergent move were about 9 months leading to break to downside. Oct 17 2012 --- Feb 22 2021In 2012, AAPL sold from 20 - 12.50 in this time period. No guarantee it will have a similar conclusion but definitely interesting and worth keeping an eye on. I'm planning to stay on the sideline this week mostly to see how it plays out, but anticipating another week or selling in NasdaqThanks for the reference article!
So its sheep sheep sheep sheep till we see the first camel?I was talking to my broker last Tuesday and he was in some secret insider dark place and couldn't give details. Or maybe it was just him having a bad day.Verifiable news about margin abuse or an actual cash shortage would clear thinks up. Unfortunately all I can do is search the links for whatever this big negative news break might be.
You are a funny man! So investors who had headed for the relative safety of government bonds will suddenly move their assets to purely-speculative belly-button-lint crypto to have it participate in the bitcoin blunder? Hardly likely, that's a totally different mindset.
What I have heard regarding “cash on the sidelines” pertains to pent up consumer demand and the expected demand side shock that could cause an inflationary spike due to diminished supply surplus triggered by the pandemic.
What I haven’t heard is any real substantive discussion of the inflationary pressure caused by energy price increases on the economy. All I hear is the issue of the Fed and rate adjustments.
I think the Euphoria end that may or may not signal the top of market - was GME - AMC and the Reddit mobs,The prior year with Davey Day trade and the unwavering bounce from covid lows. the cycle was complet when he was on CNBC pitching his new ETF ( BUZZ ). finance.yahoo.com/...
Uncharted waters..historical charts etc..how are they relevant today ?
No one on the planet has seen this set of circumstances..we are all guessing is the only conclusion one can make. Uncertainty is not a friend for investors.
I am not a deflation guy by the way. I think bond bulls are gonna be carted out in body bags. The guys who bought French 50 years bonds in early jan have already lost 24 years of "yield".