The American S&P 500 index has increased by more than 60 percent from its local low, which was set on 23 March. Since then, we have seen a systematic decrease in the level of cash, which is maintained by financial institutions.
According to the Bank of America survey, the cash level in the entire portfolio of the surveyed financial institutions and investment funds was 4 percent on average in December. This means that the level of cash in relation to November dropped from 4.1 percent and is therefore at its lowest level since the beginning of the pandemic. During the period of the greatest shock in the markets caused by COVID-19, the level of cash among the institutions surveyed by the Bank of America rose to 6 percent. Since March, it systematically decreased, and instead of cash in the funds' portfolios other assets began to appear, including American stocks.
According to Bank of America Global Research, such a low level of cash may be a potential signal, as the free cash resources have already been spent, mainly on the shares of value companies and on the shares of emerging market companies. This, in turn, has translated into strong increases in stock indices, including the EU 50 and DAX indices in November and December. According to BofA, value shares are seen as highly correlated with changes in economic prospects, while emerging market shares are gaining in value as a result of global economic recovery and the weakening of the US dollar.
According to a study by an American bank, if the level of cash among investors drops to 4 percent, the S&P 500 index falls by an average of 3.2 percent in the following month. This statistic does not necessarily mean that next year will be marked by declines in stock indices, but could only warn against short-term turbulence and corrections. In the long run, as long as central banks and governments continue to support the economy and the financial sector, institutions will receive more cash to buy more assets.
According to Bank of America, the current short-term bearish signal is consistent with other stock market data, such as the PUT/CALL ratio showing record optimism for further growth. Further data shows that the market may be over-optimistic, as about 76% of the S&P 500 shares are above their 50-day moving averages, a level which, according to Canaccord Genuity's strategies, is in the "extreme overbought" territory.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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