Cash on the Sidelines: Yelling FIRE in a Crowded Theater?

Monday, August 17, 2009 , , , 0 Comments

Idled cash: more fuel for stocks, or fire hazard?

One of the stock market's favorite accepted nuggets of wisdom is the notion that there's a pile of money waiting in the wings, itching to jump back into the market.

Investors should be careful what they wish for: Such a move is more likely to signal a topping-out in the recent rally than a sign that it will ignite a new run in the market.

In addition, the long-term outlook is clouded. The amount of money investors have liquid when compared with their share holdings is right around the post-World War II average, suggesting that there is no guarantee of a new wave of money into stocks as a result of a pronounced shift in investing preferences.

The S&P 500 has surged nearly 50 percent since March, and pullbacks have been shallow and short-lived. One of the reasons for the brief nature of declines is the hope that there exist legions of investors who sat out the rally and are now anxious to move funds out of safer bets and into riskier stocks.

Of late there has been an influx of money, but it's not necessarily good news. Recent experience shows that the biggest influx of money comes at the peak, according to Birinyi Associates.

"It's somewhat of a reverse indicator," said Jeff Rubin, market strategist at Birinyi in Westport, Connecticut. "You do want money going in, but you don't want this tremendous shift."

While it hasn't been a tidal wave, money is returning to stocks, according to data from the Investment Company Institute. For the week ended August 5, equity funds saw an estimated inflow of $5.5 billion, compared with an inflow of $3.4 billion the previous week.
More bad news for fragile markets.

Just wait until the Fed funny money hits the fan! Oh wait...

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.