'Cash On The Sidelines' Crashes Near Record Lows

With hedge fund liquidity (and their ability to absorb any market shock) at record lows, it seems retail investors are also all-in on stocks. As Ned Davis Research points out, total cash holdings for funds at lowest in 19 years.

In a Ned Davis calculation that treats the global investment portfolio as an amalgamation of stocks, bonds and cash, the latter now makes up about 17 percent of investor portfolios, less than half of its allocation in 2009 and close to the lowest since 1980.

"Cash is underweight" in Planet Earth's asset portfolio, says Ned Davis Research, as relative to balances in money market funds and cash among mutual fund managers, the value of global equities is the highest in almost two decades.

As Bloomberg notes, another way of describing it is that equities have risen so much from the depths of the financial crisis that their value is blotting out everything else to an extent not seen since the dot-com bubble. Like much valuation research these days, the Ned Davis study serves to illustrate exuberance among investors, showing that stocks keep levitating relative to a touchstone like cash that’s less given to volatility. “It’s a way of showing stocks are pretty stretched, but that’s not to say they’re going to go down tomorrow,” Ed Clissold, chief U.S. strategist at the Venice, Florida-based firm, said by phone. “It just means there’s not a lot of cash to act as a shock absorber. This measure does tend to mean revert over time, and we’re near the low-end of the range, so this ratio will go back up again.”

As we noted previously, assets in bear market funds are at record lows.

 

And it's not just retail, the hedgies are all-in too. As a reminder, Novus recently noted that hedge fund liquidity is at an all-time low - the ability to withstand any market stock is at a record low.

Simply put, the massively overcrowded hedge fund herding into US equities has created a crisis situation. With liquidity levels at record lows, the market will be unable to smoothly absorb any concerted selling pressure from large money managers.

“Their ability to sell in the marketplace is really going to depend on their peers who are trying to sell at the same time,” Stan Altshuller, chief research officer at the analytics firm, said by phone. “It becomes the prisoner’s dilemma.”

Finally, we note that the last bear market started in October 2007, just four months after liquidity appeared to be drained out from hedge funds.