Weight lifting

The FTSE 100 is once again within 1% of the trading range that has lasted nearly a year. The initial catalyst for today’s move was the official data released over the weekend that Chinese banks have issued over $200bn of new loans in January. It would seem at present that the China slow down fears is subsiding. 

Merrill Lynch believes there are 5 indicators to time market entry, one of which is global flow. In the week that equity markets bottomed they saw the largest outflows, $28bn, from global equities, representing the largest out flow in the history of their data. They rightly point out that greed and fear are driving risk assets at present. 

Other indicators that Merrill Lynch look for when deciding when the market is ripe for a recovery are the number of indices trading below their 50 and 200 day moving averages, a proprietary index of their creation, and a global FMS cash rule. This cash rule is a monthly survey of 300-400 mainly long-only fund managers, asking for a cash balance as a percentage of assets under management. According to ML, when cash levels exceed 4.5% of AUM, it’s a contrarian buy signal. Cash levels have exceeded 4.5% since late 2011, except for one small period at the start of 2013 when they fell to 3.75%.

Source: Merrill Lynch

As you can see from the chart when the market bottomed in early 2009, cash levels according to this survey were at nearly 5.5%. At the height of the 2007 market, cash levels fell briefly to below 3%. Cash levels currently remain above 4.5%, at least according to this survey equities have room to move higher. 

Equities “climb a wall of worry” so the saying goes and looking at this survey and some anecdotal evidence that suggests equity weightings remain below historic levels within the retail space as well. Hopefully there is enough worry left for equities to keep climbing.

Posted on February 18, 2014 .