Best Financial Markets Analysis Article History shows that as a group mutual fund managers act like a typical crowd … susceptible to herding and group thinking.

They are most heavily invested near important market tops. And at market bottoms most of them turn bearish. That will never change … it’s human nature.

Hence it makes a lot of sense to look at what fund managers are doing — and take the opposite position whenever they are all doing the same thing. That’s why one of my favorite cyclical sentiment indicators is the average cash level of mutual funds.

Just look at the following chart. It shows the NYSE Composite Index on a monthly basis and the mutual fund cash level since 2005.

chart Mutual Fund Managers Got It Wrong ... Again!

Next, fast forward to today …

Mutual Fund Cash Level Hits Record Low!

Here we are in early September 2010 with the NYSE Composite still some 32 percent below its 2007 high. But mutual fund managers as a group are as heavily invested as never before.

It’s hard to believe, but they actually set a new record low in July with a cash level of a miniscule 3.4 percent! Yes, that’s right, mutual fund managers have never been more heavily invested than today. In other words, they’ve never been more bullish than now.

Fund managers are just about out of cash to invest.

The history of the mutual fund cash level as a contrary indicator is very compelling. In fact, going back you can see the same pattern during the past decade …

Whenever fund managers’ bullishness rose to extreme levels it was a very good time to get out of the stock market.

So will it be different this time around?

Expect a Bear Market

Of course I’m not betting the farm on this or any other single indicator. Nor should you. The mutual fund cash level is but one of many different indicators I use to come up with my market forecasts …

And since most of my indicators — like liquidity, fundamental valuation, technical analysis, and sentiment — support the idea of a bear market, that’s exactly what I am expecting for the coming months.

Best wishes,

Claus

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