Ready Money? Funds' Cash Levels Rose 9.4% in September

U.S. stock fund managers' cash stakes jumped 9.4% from the end of August to the end of September, according to liquidity tracker TrimTabs.com. Over the past two years, that's been a clear sign that the stock market is about to climb.

For the past few weeks, fund industry observers and insiders have hinted that funds' cash positions were building up as managers practiced tax-loss selling-dumping losing positions to reduce their taxable capital gains distributions to investors. Now those rumors are confirmed.

At the conclusion of the TrimTabs.com report, the firm weighs in on what this information might mean: "Does [this] mean the stock market has bottomed here? In our opinion, yes."

Of course, there's more to the market than liquidity levels. But this is clearly an intriguing nugget of information that the market tracks closely.

At the end of August, cash made up less than 4.5% of U.S. stock funds' assets, but by the end of September that figure rose to 5.1% -- funds' highest cash position since November 1998, according to the report, which is dated Nov. 1. Over the last two years whenever funds' cash stakes have jumped more than 6% in one month the market has headed north over the next 90 days, according to TrimTabs.com.

For fund investors, this means that their manager might be keeping more money than usual on the sidelines in a tough market, and may be set to put it to work before year-end. For stock investors, this may indicate bonny days ahead.

Following managers' cumulative portfolio moves is seen as a solid market indicator because the billions of dollars behind these percentages can move the market in a hurry. Consider that at the end of September U.S. stock funds had more than $190 billion in cash-a figure that rose by more than $16 billion during a month when the Nasdaq Composite dropped 12.7% and the S&P 500 fell 5.3%, according to Baseline.

A high cash position in funds is a classic contrarian indicator. It's generally good news for the stock market because once managers invest just a bit of the money, they can push stock prices higher. On the flip side, a low cash position in funds can point to a market top. Consider that the lowest cash stake for funds over the last 30 years, 3.9%, came in March 2000 when stocks peaked and fell precipitously. The idea being that funds hadn't much more money to invest making it tough for stock prices to rise.

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