Friday, November 08, 2013

Retail Investor Cash Hits Low Along With Fear

Rydex Cash Levels have fallen to extreme lows recently (See chart below).  The Rydex Cash Level measures the cash held in Rydex money markets.  Historically, pullbacks or corrections occur when these levels reach the .4 marker, but the past three times the index has hit the .4 level, the pullbacks have been short-lived.  This is a sign that that those investors sitting on cash are eager to invest in equities in fear of missing out on this strong equity market rally. Alternatively, ICI data shows money market cash in mutual funds has been trended higher since April of this year.

Rydex Cash

At the same time, the CBOE Volatility S&P 500 Index (.VIX), also known as the “Fear” Index, is near 2007 lows (Chart Below).  The VIX displays 30-day forward volatility for the markets.  The index is used as a measure of market risk.


Investor sentiment appears to be worry-free by these two measures.  Some believe these indicators are projecting a market correction ahead, but not so fast.  Fed driven liquidity is providing a favorable environment for equities in a seasonal period where, historically, equity markets have been strong.  Investors have been and continue to be rewarded for taking a “risk-on” approach in terms of investing in risk asset classes.  As for how long this will continue, no one knows for sure.  The equity markets have enjoyed larger gains in the past during this generally positive seasonal period and saying “this time it will be different” can be a dangerous position to take.

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