Fear or complacency stocks indicator

US stock index and mutual fund cash level (1950-2008)

A manager can maintain a higher weight of his portfolio without investing, for two reasons. Firstly, for fear that the stock market will go down more. In this case the manager prefer to maintain high levels of liquidity for avoid losses to its investors. Secondly, if we are in a “bear” market, the manager knows that some of his clients will sell their funds investment for fear of further losses. In this scenario, the manager will prefer to have lower levels of investments to provide liquidity for these sales. So it seems obvious that the times of nerves on the stock exchange is equivalent to high levels of liquidity and, on the other hand, years of euphoria on the stock Exchange, the managers maintains as much invested to take advantage of the bull market.

As we can see in the chart, in the complicated 70s and 80s, the average liquidity of the Mutual Funds industry are 10% of its assets. It is from the mid-90s when it began its long bull cycle, so the weight of the liquidity is decreasing year after year until the minimum reached in the summer of 2007 (which coincides with the historical top in US stocks indexs).

The current levels of less than 5%, is an indicator that we are perhaps at the end of a bullish stock market cycle.