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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: kabbott who wrote (50248)	5/10/2000 9:36:00 PM
From: pater tenebrarum	Read Replies (1) \| Respond to of 99985

k, sure they do. but that's not the point of this exercise. the reason for watching mutual fund cash-to-asset ratios is to gauge how much potential buying power is out there. it is a fact that this ratio is historically inversely correlated with the market, as they tend to sell on the way down and buy on the way up. extremes in the ratio usually mark important turning points. it is a tool in the arsenal of technical indicators. the '74, '82, '87 and '94 bottoms all were marked by mutual funds cash-to-asset ratios well in the double digits. conversely, tops invariably coincided with unusually low ratios. this is an important factoid imo. note btw. that the broad market, as measured by the S&P/DOW/OEX/VGY, has made zero progress in well over a year. during this time, the funds cash-to-asset ratio has oscillated between 3,8% - 4,8% , a historically extremely low level. it shows that inflows (which were massive during this period, especially during the first quarter of this year) were invested as soon as they arrived. at the same time though, a flood of IPO's, secondaries and insider selling has hit the market and sucked up the entire liquidity flowing in. basically, money has been re-distributed from the public to corporate insiders. this is what Warren Buffett called "the monetization of shareholder ignorance". of course it is not necessarily important for short term market direction what the fund cash reserves are. but it definitely is important from a longer term perspective. regards, hb