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Incredibly Important Chart
Once in a while a chart is sent to us that says it all. Looking at the latter stages of this chart, it is clear that this will end in tears. In a communication with King World News this morning, Kevin Duffy passed along the extraordinary chart, and had some extremely interesting commentary to go along with it.
September 13, 2010
Mutual Fund Cash At Historical Low:
The percentage of liquid assets (aka mutual cash levels) was 3.4% in July. This is the lowest percentage cash level ever and is near levels that accompanied the 2007 equity market peak.
Kevin Duffy:
Equity put/call is a decent indicator and it shows some bullishness, though not as much as at the mid-April top. My favorite short/intermediate-term sentiment indicator currently is the VIX – at less than 22 it signals we’re close to a top. My favorite intermediate/long-term indicators (the quantitative ones) are money market fund balances (low) and equity fund cash levels (record lows). Both signal extreme bullishness.
The best sentiment indicators are probably qualitative. This is not the same type of market as 2000 when the individual was all-in. He was run over by the tech bubble, then got baked in real estate. Yet he’s still long the market through his pension and 401-k (where he might be borrowing against). The individual has delegated to the “professional” this time which is where to look for sentiment clues – portfolio managers (equity fund cash levels), strategists, economists, financial journalists/pundits, etc.
The fact that Jim Cramer and Larry Kudlow are still employed and bullish is all you need to know from a sentiment standpoint. Ironically, some of these professionals are making the mistake of confusing relative bearishness among individuals as a contrary indicator and reason for optimism. I like to call this the “double contrary,” a rationalization that was quite prevalent during the last market peak in 2007.
I would encourage King World News readers and listeners globally to be cautious here. It is difficult to say precisely when the market will begin its descent but remember this, these setups have a way of bringing overly confident investors to their knees by the time the bearish phase has run its course.
Eric King
