Current Stock Prices: Why Trillions of Dollars on the Sidelines Maybe A Good Thing

Current Stock Prices

You can’t blame most market investors for being nervous…

• The stock market has done a belly flop.
• Real estate keeps tumbling.
• The economy remains weak.
• Jobless claims lately hit a 26-year high.

Investors have pulled tens of greenbacks out of dollars out of stocks and plunked it in the bank.

Valuations are fascinating. Negative sentiment is a bullish signal, not a bearish one. And all that cash sitting on the sidelines is actually a good thing.

The Worst Year For the exchange

Last year was the worst year for the stock exchange since 1931.

In the second half, speculators pulled many billions of greenbacks out of dollars out of equity mutual funds and squirreled them away in cash accounts paying 1% - or less.

Some researchers see this as a gigantic negative. It’s not.

Today there’s more cash available to buy shares than at any point in virtually twenty years. The $8.85 trillion held in notes, bank deposits and cash market funds is to 74% of the market valuation of U.S. Companies, the highest proportion since 1990, according to the Federal Reserve.

What went on during the past when money reached these levels?
- In September 1974, money available reached $604.5 bln, representing a record 1.21 times the U.S. Stock exchange’s capitalization. That preceded a 31% gain in instruments between October 1974 and March 1975.
- In July 1982, just as a 20-month bear market was ending, money as a percentage of the U.S. Market’s value rose to 95%. The S&P 5 hundred started a six-month, 36% advance.

According to Bloomberg, the 8 prior times that money peaked compared with the market’s capitalization, the S&P five hundred rose a mean 24% in 6 months.

There are no guarantees, but this is a very positive near-term signal for the market.

Understanding the import of High Money Levels

Smart investors - even bearish ones - understand the significancy of high money levels. For example, Leuthold Group, whose Grizzly Short Fund returned 83% in 2008 thanks to bets against stocks, latterly put out a bulletin calling stocks “one of the great purchasing opportunities of your lifetime.”

The report pointed out that the ratio of cash on hand to U.S. market capitalization jumped 86% in the first 11 months of last year. That is the biggest increase since the Federal Agency began keeping records in 1959.

And it probably won’t take long. Of course, money is earning a negative real return at this time. Speculators will get itchy eventually. And when they do, that cash will return to the market.

Investor psychology was badly scarred during the last fifteen months, however. So I think the early cash streaming back will seek a home in large, safe, blue-chip stocks.

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