For those who know us well, they know we do all our own research, and rarely listen to others. We do this not because we are arrogant, but rather we have developed our own process and don’t want to be swayed from it. However, there is always an exception to that rule, and for us that exception is Ned Davis. We make an exception for Ned because he is the father of the data driven approach. Additionally, we know when he speaks it comes from an unbiased and unemotional standpoint.
As we always say there is no holy grail, although there is such a thing as following the weight of the evidence. That said, a standing Google News alert we have set for Ned Davis hit our inbox this AM. The alert, from a USA Today story yesterday, entitled “Why cash is trash thinking threatens stocks,” features Ned and his NDR Research Group prominently. The article mainly centers on how low present liquidity levels are. Below we cliff note the story.
In the article Ned highlights two key statistics, Mutual Fund and individual investor cash levels, to drive home his point that shrinking cash levels could pose a danger to stocks at some point.
1. Stock mutual funds’ cash reserves hit all-time record low. “Mutual fund liquidity (or the cash set aside in fund portfolios by money managers) hit an all-time record low in June, with cash just 3.0% of assets,” noted Ned Davis, the firm’s senior investment strategist, in a client report. “This is much lower than seen at the 2000 and 2007 peaks in the market.”
2. Fund investors’ cash stash also at record low. When it comes to fund owners’ asset mix, only 18.3% is in cash mutual funds, “again a record low,” according to NDR. In contrast, customers have 60.1% of their money invested in stock funds and 21.7% in bond funds, NDR data show.
In addition to liquidity fears, Ned also suggests the S&P 500, based on operating earnings and median earnings of Corporate America over the long-term, is overvalued by 16%. He suggests a correction could take the index down to 1,600.
Given the weak internals and technicals of late, we would definitely take heed of his warning.