Low Cash Levels Point to Extreme Bullishness

It is straightforward to evaluate if investors are more bullish or more pessimistic by analyzing the quantity of cash held relative to risk assets. Both professional and retail investors should be aware of this. 

The higher the cash levels, the more bearish the market, and the lower the cash levels, the more bullish the market. 

This is a key indicator of sentiment, and it currently indicates a historically high degree of optimism. 

Mutual fund cash plummeted to 3.6% of total assets in March, according to a revised figure from the Investment Company Institute, a new all-time low. 

The new low is higher than the prior lows of 3.9%, which occurred six months before the 1973 market top, and 4.0%, which occurred at the market’s climax in 2000. 

Because practically everyone is nearly fully invested, there isn’t much money waiting on the sidelines that could be used to keep the markets moving upward. 

Here’s a graph which shows retail money-market holdings as a percentage of the S&P 500 market capitalization. 

As you can see, we’ve now dropped to a new all-time low of 2%.