Quant Macro Investing

Risk Taking Disciplined

U.S. stock market eyes investor cash still on the sidelines

NEW YORK (MarketWatch) — The U.S. stock market, which on Wednesday finished higher for a third straight day, is benefiting in part by the belief that money now collecting dust in the observation deck will eventually find a home in equities. “As you look at the cash-on-the-sidelines argument, it hypothetically represents pent-up demand for equities,” said Art Hogan, chief market strategist at Jefferies & Co.

U.S. money market fund assets most recently stood at $3.56 trillion, down from their March peak of $3.8 trillion, but still about double the amount of funds typically held, Hogan said. “There is always going to be some level of cash on the sidelines, but as the market gets better it comes down as investors take on more risk, whether it’s in stocks or bonds,” said Hogan, a scenario that helps explain the recent trend of stock and Treasury prices both moving higher when they more typically move in opposite directions. On Wednesday, energy and financial shares fronted the broad market’s gains after a slew of positive economic data, including a 0.8% climb in industrial production in August. Read Economic report.

“Until we see a reason to sell off there is enough money sitting on the sideline asking every day, where’s the top, am I missing this? Equity markets are seeing this money flow back in to some extent,” said Bruce Shalett, managing partner of Wynston Hill. Mountain views

But two equity analysts at Citigroup Global Markets Inc. question the premise of the so-called “mountain of cash sitting on the sidelines.” Writing in a research note earlier this month, Tobias Levkovich and Lorraine Schmitt write that of the trillions of money market funds reported by the Investment Company Institute, only $1.17 trillion can be attributed to retail funds or individual investors. Much of the remaining involves corporate or even government institutional money funds that may never find its way into the stock market, Levkovich and Schmitt write. “We suspect that the sentiment issue is more dominant and there has been some cooling off of the American equity culture that may take years to reinvigorate.” Hogan, for one, believes the Citi analysts may well have a point, saying some people may be “scared off from the stock market forever, thinking the game is rigged and that there is a plunge protection team” ready to jump in and maneuver the market. Kate Gibson is a reporter for MarketWatch, based in New York.

September 17, 2009 - Posted by | Indicator setup

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