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Stocks: What You Should Know About the Behavior of Retail Investors

“Cash is being shunned by virtually everyone.”

by Bob Stokes
Updated: January 04, 2022

An easy way to gauge the degree of bullishness or bearishness of investors, both professional and retail, is to look at how much cash is being held relative to risk assets.

Of course, the higher the cash levels, the more bearish, and the lower the cash levels, the more bullish.

Well, back in the first half of 2007, many investors considered "cash to be trash," as the saying goes.

Here's a chart and commentary from our July 2007 Elliott Wave Financial Forecast:


[An] important measure of sentiment that is showing a historically unprecedented level of optimism is the percentage of mutual fund cash levels relative to assets. A revised figure from the Investment Company Institute shows that mutual fund cash dropped to just 3.6% in March, 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.

As you probably know, the stock market went on to top about three months later, and then slid into a big bear market.

A key takeaway is that when almost everyone is nearly fully invested, there's hardly anyone left to keep pushing the market higher.

With that in mind, our December Elliott Wave Theorist reviewed a host of sentiment measures from 2021. Here's one of them along with the Theorist's comments:


The chart shows retail money-market holdings as a percentage of S&P market capitalization.

You can see that back in 2009, in the middle of the chart, the ratio was over 12%. That's quite a bit of cash relative to the value of stocks.

We've just made a new all-time low at 2%, so the amount of cash held in money markets relative to the value of stocks is extremely low, in fact, historically low.

Cash is being shunned by virtually everyone.

However, just like in 2007, the fact that investors are shunning cash may be a sign that it's time to load up on it.

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