Investors, Career Market Traders, as well as Money Managers are all nervous about the Stock Market potentially falling from lofty multiyear highs. As the potential for the markets to exceed multi year highs and even approach multigenerational highs is within the bulls grasp one can't help but wonder if a deep and treacherous drop could occur any time between now and that point (1576.09 on the S&P 500 Cash Index).
Doug Kass in a recent CNBC interview suggested a top was in and no new top would be see again this year. When a notable Market Technician of this caliber suggests a market top is in the fear begins to spread like a virus. Whether he is right or wrong could be a question of months and this means months of fear and wondering and waiting. The idea of a market correction occurring and possibly turning into something more significant has even the savvy investor and institutional manager looking over their shoulders. The term "most hated rally in years" is being tossed around even now.
So, is there any method to calm ones nerves? Is there evidence to substantiate a market top? YES! Many investors and Institutional Money Managers monitor the size of "liquid funds" available for potential use in the markets. Money Market Mutual Funds May provide a hint of available cash to keep the rally going and on occasion demonstrate clear illiquid conditions unsupportive of market growth.
Money Market Mutual Funds are a parking spot for many investors. The 2467.9 Billions of dollars outstanding as of the end of the 3rd quarter (September 2012) , not seasonally adjusted, (See www.federalreserve.gov/econresdata/stati... ) represents a ratio of 16.4% compared to the Wilshire 5000 close as of Septembers' monthly data (log Scale) of 15044.22.
Ned Davis research looks at the relationship between available assets in money market mutual funds and the stock market and notes that the market's tend to advance 14.8% per annum when this ratio first exceeds 12.8%. (Dahlquist PhD. 2007). Conversely A drop in the ration below 11.4% has a tendency to decline as less funds are available for excessively optimistic investors to move into market equities.
The current ratio of 16.4% suggest cash is available. But this ratio has been steadily declining since 2009. Thus there is sufficient monies on the sidelines as of the end of the 3rd quarter and into the "best quarter of the year" to keep the rallies going. However, one caveat is no way to know if investors will actually move the funds into the markets. These monies while available for use could be put just about any place if moved at all.
Knowledge of the availability of funds or "cash on the sidelines" is a weapon in the arsenal of any good fund manager and savvy investor and should be monitored at least monthly to help establish a good bit of evidence for or against market tops and bottoms. And while there no way of knowing the end use of the cash it's better to know it's at lease available if you are bullish at a potential market top. So, before you become completely cocky bear at this particular market top consider the liquid funds still ready to join the rally by the timid bulls does still sit quietly on the sidelines just as the "best quarter of the year" and the "Seasonal Best Six"(Yale Hirsch) performing months get underway. Join me for additional live commentary on the subject at TideTraders.com