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Portfolio Cash Levels Hit New Extremes – And What This Likely Means

“Cash is trash” again – and we’ve seen it before

One sign of a bullish extreme is when a lot of investors have allocated only a small percentage of their portfolios to cash.

Financial history teaches that when the percentage is so low that a new record is reached, turbulence in the stock market may be just down the road.

For example, consider this chart and commentary from our July 2007 Elliott Wave Financial Forecast:

KingCash

Another important measure of sentiment that is showing a historically unprecedented level of optimism is the percentage of mutual fund cash levels relative to assets... Mutual fund cash dropped to just 3.6% in March [2007], an all-time record low. The reading breaks the lows of 3.9%, which came six months before a major stock peak in 1973, and 4.0%, which accompanied the March 2000 top in the S&P and NASDAQ.

So, a record low level of cash is not always a precise timing indicator. Sometimes months pass before a top is reached -- then again -- sometimes this "signal" occurs around the same time as a market peak.

For example, a record low level of cash did coincide with S&P and NASDAQ tops in 2000. On the other hand, it took another six months in 1973 and another four months in 2007. Still, either way, it's a valuable signal, especially when you combine this sentiment measure with the Elliott wave model and an array of technical indicators. Indeed, EWI's analysts regularly review over 100 indicators when analyzing financial markets.

There's a good reason for bringing up the subject of portfolio cash levels here in the summer of 2020.

Our newest, August 2020 Financial Forecast mentions that "Rydex investors' revulsion toward cash returned to its lowest level ever."

We also show you an updated chart of how cash levels have aligned with the stock market's tops and bottoms.

Again, the key is to combine the cash-level indicator with the current message of the Elliott wave model.

So, learn what our Elliott wave experts are saying about the price pattern of the stock market, plus get insights into other important indicators -- risk-free for 30 days.

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