【More bullish than any time since early 1990s】

trueself

By Mark Hulbert, MarketWatch

Here is today's investment pop quiz: Which stock market timing indicator is more bullish today than at any other time since the early 1990s?

You might think that no such indicator could possibly exist, since the stock market's rally over the last eight months has far overshot almost everyone's expectations -- including another 136 points in Monday's trading alone for the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (INDU 10,437, +30.46, +0.29%) .

But there is at least one apparent answer to this pop quiz question: U.S. equity funds' cash levels.

That, at least according to research conducted by Norman Fosback, editor of Fosback's Fund Forecaster. Fosback several decades ago developed a model based on mutual-fund cash levels that became the basis of what he says is his single favorite market timing indicator. He liked it so much, in fact, that he dubbed it the Fosback Index.

Don't be too hard on yourself if it didn't occur to you that mutual-fund cash levels might be so bullish, however. News reports in recent weeks have actually been reporting just the opposite -- that fund cash levels are dangerously low.

As of the end of September, for example, the latest reporting period from the Investment Company Institute, domestic equity funds' cash-to-assets ratio stood at 3.6%, which is only slightly more than half this ratio's average dating back to 1984.

In fact, according to the ICI data, there was only one other time over the last 25 years when this ratio was any lower than today: Right before the 1987 stock market crash, the worst in U.S. history, when this ratio dipped to 3.5%.

How, then, can Fosback argue that mutual-fund cash levels currently are so bullish?

The answer: Fosback focuses on the difference between a fund's actual cash level and what we would otherwise expect that level to be, given prevailing interest rates. And while raw cash levels currently are quite low at the average domestic equity fund, so are interest rates.

Fosback explains the rationale for his Fosback Index in this way: "When interest rates are high, as in the 1970s and 1980s, the funds earn a high risk-free return in the money market and have an obvious risk-reward incentive to own those securities. Similarly, when money rates are lower, as in the late 1990s and throughout this decade, the profit incentive on cash is correspondingly less. This is why the [Mutual Fund] Cash/Assets Ratio was high in the earlier periods and is ultra-low today."

Fosback sees today's high levels of the Fosback Index as a "virtual repeat of what occurred in 2003-04, which signaled the end of the high-tech bubble burst and the start of the bull market that persisted until the 2008-09 bear." Just as is the case today, Fosback points out, the high levels of the Fosback index in 2003 and 2004 "occurred even while the Cash/Assets Ratio was well below average by historical comparison."

Let's hope that the analogy continues to hold.

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.

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cash level argument is the stupiest arguement.
rffpgadsp 发表于 2009-11-19 11:34

Reason?