Is the Current Cash Amount Sufficient to Further Boost Stock Prices?
In the recent financial landscape, a combination of low Fund Manager Survey (FMS) cash levels and extreme bullishness in the AAII Bull%-Bear% spread has raised concerns about potential market pullbacks.
Last month, the S&P 500 closed up 2.1%, marking a positive July performance. However, the index experienced a downside reversal towards the end of the month, resulting in lower weekly closes. This downward trend continued into the first week of August, with the S&P 500 yet to recover.
The FMS cash level, which reflects the amount of cash held by fund managers, has been on a steady decline. In August 2024, the cash level was at 4.3%, dropping to 3.9% in the recently released report, a level considered a "sell signal" by Bank of America. This low cash level indicates that fund managers are heavily invested, leaving little dry powder to fuel further market gains, often suggesting a near-term market top or increased risk.
Simultaneously, the AAII sentiment data, which measures the difference between bullish and bearish sentiment, has been showing signs of extreme bullishness. The bull%-bear% had peaked in late 2024 and then spiked to a brief reading of 15% in January 2025. The current reading stands at -40, indicating 40% more bears than bulls, a stark contrast to the post-election levels in 2024.
Historically, low FMS cash levels combined with extreme bullishness in the AAII Bull%-Bear% spread often precede periods of weaker or negative short-term market returns. Since 2011, such low cash-level signals have occurred 17 times, with the median S&P 500 return in the following four weeks being -2%, and the worst drop reaching -29%. This suggests that when fund managers are heavily invested and sentiment is euphoric, as it is currently, the risk of weaker future returns or corrections increases.
However, it's essential to note that these are near-term timing tools rather than long-term directional predictors. Market timing is inherently challenging, and these indicators should be used as a guide rather than a definitive predictor of market movements.
As of August 7, the Nasdaq Composite is up 3.7%, while the Dow Jones Industrial Average (DIA) is down 3.6%. The QQQ, an exchange-traded fund that tracks the Nasdaq 100, is up 0.75%. These figures underscore the ongoing market volatility and the need for careful consideration when making investment decisions.
In conclusion, the current combination of low FMS cash levels and extreme bullishness in the AAII Bull%-Bear% spread serves as a useful market timing signal to caution or reduce risk. Investors are advised to closely monitor these indicators and consider diversifying their portfolios to manage risk.
The recent financial landscape, characterized by low Fund Manager Survey (FMS) cash levels and extreme bullishness in the AAII Bull%-Bear% spread, poses a potential risk for short-term market pullbacks in the business and investing realm, especially in the stock-market, including the S&P 500, NASDAQ 100 represented by TQQQ, or the QQQ. It's critical for investors to keep a watch on these signals, as they may indicate increased risk and potentially weaker future returns or corrections.
