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Why Most Equity Mutual Funds Are (Again) Ill-Prepared for a Bear Market

Professional money managers herd “right along with other speculators”

by Bob Stokes
Updated: May 03, 2022

Is a bear market already underway in the U.S.?

Only time will tell for sure. What is known is that the Dow Industrials and S&P 500 index topped in January and the NASDAQ registered a peak back in November.

Indeed, here's an April 29 Wall Street Journal headline:

Tech Rout Drags Nasdaq to Worst Month Since 2008

Of course, it's possible that all three indexes could roar back, but if a bear market is underway, equity mutual funds are ill-positioned.

Our April Elliott Wave Financial Forecast explains why with this chart and commentary:

NoCash

By historical standards, equity mutual fund managers hold record low levels of cash relative to their total assets. In December, the ratio fell to 1.9%, matching the... lowest [reading] on record. The latest reading, 2.1% in January, is lower than all but nine monthly readings since the mid-1950s.

So, equity mutual funds were nearly fully invested in the stock market around the time of the January peaks in the Dow and S&P 500 index.

Historically, this is not surprising, as this chart and commentary from Robert Prechter's landmark book, The Socionomic Theory of Finance, reveal:

MutualFundHerd

It is widely known that professional money managers, in the aggregate, fail to beat the market. The result is not, as some theorists say, because the market moves randomly. It is because most professionals are herding, right along with other speculators. [The chart shows] that at good prices for buying stock, mutual fund managers have high levels of cash, and at good prices for selling, they have low levels of cash.

The cash percentage of equity mutual funds is just one indicator to consider.

The primary factor that our analysts study is the stock market's Elliott wave structure.

Right now, it's sending a critical message that every investor should know.

Follow the link below to read our just-published May Financial Forecast Service, which provides you with near-, intermediate- and big-picture Elliott wave analysis of the U.S. stock market, bonds, gold, silver, the U.S. dollar and much more.

Get Ahead of the Stock Market’s Next Big Move

The new May Elliott Wave Financial Forecast reveals why the volatility in the stock market may only be in its early stages.

You are strongly encouraged to learn what our analysts are saying about the market's Elliott wave pattern.

It all boils down to one thing: portfolio protection!

The May Elliott Wave Financial Forecast also offers important insights into the historic shift in the direction of interest rates as well as the "cryptosphere."

Follow the link below so you can prepare for what may be just ahead.

Financial Forecast Service

$97

All month long, Financial Forecast Service helps you stay ahead of the waves in the U.S. markets on the timeframes that matter the most. FFS covers the stock indexes, bonds, gold, silver, the U.S. dollar, as well as market psychology and cultural trends. It is our most popular service.

Comprises the monthly Elliott Wave Financial Forecast, 3x-per-week Short Term Update and at least 12x-per-year Elliott Wave Theorist.

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