Fund Cash Levels Close to Multiyear Lows, Another Sell Signal

Cash in U.S. stock mutual funds has sunk to 3.6 percent of total assets, a shade above the lowest level in 23 years. That bodes ill for the stock market because it leaves portfolio managers with less buying power to push prices higher.

The paltry proportion of fund assets in cash in December, the most recent month for which the Investment Company Institute, a trade group, had compiled data, is the smallest since June and July of 2007. That was just before the start of the worst bear market since the era of "Brother, Can You Spare a Dime." Cash levels rose steadily through the bear market, reaching 5.7 percent last winter, just in time for the sharp recovery in stocks.

It's not just American fund managers who have run low on ammunition. A survey of portfolio managers around the world by Banc of America Securities-Merrill Lynch found that cash amounted to 3.4 percent of assets in mid-January, equal to the July 2007 level and less than at any other point in at least a decade.

Gary Baker, a European equity strategist at Merrill, pointed out that global stocks fell 13 percent in six weeks after the low 2007 reading. When cash reached 3.6 percent in March 2004, the market lost 9 percent over two months.

The MSCI Barra World Index fell about 10 percent after peaking in mid-January and has held near the lows. That may be the extent of the decline, but when other bearish indicators, such as those mentioned here, here and here, are also taken into account, it seems imprudent to bet that the selling is over.