Mutual fund cash holding is usually the lowest at the peak of stock market indexes. So with only 3.6% of their asset in cash, could we be close to a top?
The following graph represents the S&P 500, in orange, versus cash holding, in white, inverted:
It definitely shows a sharp decrease from the “top” of March 2009, where 5.7% of mutual fund assets were in cash. It is a direct consequence of the ultra low return on cash, which gave strong incentives to money manager to “find” investments, and its corollary, a quick return of investors’ risk appetite.
This current level, 3.6%, has usually been associated with a high risk tolerance, which itself precedes major market tops. So in term of risk appetite, this indicator suggests a top could be close.
However, cash level seem to be trending lower since 1993, and we could imagine reaching a new low before a new top, especially since return on cash is litteraly zero.
