On Monday March 1, I came across a striking image on the front page of a popular online news site. Under the caption "Leap of Faith," the drawing depicted a smiling investor effortlessly hurdling across a wide, open chasm from "Great Recession" to "Financial Stability."
That about sums up the general viewpoint of the mainstream financial majority: i.e., even though current market "fundamentals" do not support a rebound in the U.S. stock market now, sheer hope for a future economic rebound is pushing investors back into the market. Here, the recent news items below capture the burning return of optimism:
- "We can now say this is a sustainable recovery. It's certainly not a boom, but it is a slow, steady recovery." (Washington Post)
- "The S&P 500 has gained 68% since hitting 12-year lows in March of last year. The surprise is going to be to the upside. US stocks are in a bull market." (Bloomberg)
- "Economists: Recovery Firmly On Track. We see a healthy expansion underway, although it will take time to reduce economic slack and repair damaged balance sheets." (CNN Money)
Of course, taking a "leap of faith" can be hazardous to the health of any investor's portfolio. You need proof -- tangible facts that assure you are making the right, safe decision. But "fundamentals" remain weak, so if that's your only guiding light, you don't have a choice but to take that leap of faith -- faith in a better economic tomorrow.
If you don't think there is an alternative, there is. On pages 6-7 of the March Financial Forecast, our team of analysts reveal one of the most time-tested indicators of the stock market's dominant trend: the Mutual Fund Cash-to-Assets Ratio (C-to-A ratio, for short).
The March issue presents to you this stunning close-up of the S&P 500 versus the C-to-A ratio over the last four decades and writes:
"Take a look at this chart and note the arrows that mark ratio [levels] that prevailed at significant stock market bottoms."
Then, look at the extreme Mutual Fund C-to-A ratio readings that coincided with the start of major bear markets: 3.9% prior to the 1973-4 bear market; 4.0% at the 2000-2002; and most recently, 3.4% in July 2007, three months before the Dow's all-time high.
The only question is -- what is this indicator's current reading, and does it point to an important top or bottom?