Investors Remain on the Sidelines

04/29/2010 12:00 pm EST


Dan Sullivan

Editor, The Chartist

Dan Sullivan, editor of The Chartist, says despite the market’s big advances, many investors are still in cash, providing lots of fuel for more gains.

The powerful up trend that transpired during the early phases of this bull market was met with total disbelief from many quarters. At the time, the economy was a basket case. Despite this preponderance of adverse news, the market continued to trend higher because it saw better times ahead.

As things turned out, the fourth quarter of last year entailed the fastest economic growth in six years, with corporate profits jumping 8%, the best yearly gain versus the previous year in a quarter of a century.

[Yet] despite the incredible power of this bull market, many investors remain on the sidelines waiting for a major pull back that has yet to materialize.

Undoubtedly, investors have been slow to embrace the rally after being badly burned by the bear market that preceded it. According to the Investment Company Institute (ICI), for the first two months of this year, net inflow into bond funds was $36.7 billion greater than net inflow into stock funds.

Also, [an] estimated $3.2 trillion remains in money market funds, which is approximately 52% more than the average over the past ten years. With money market yields at historic lows, it is a strong incentive for investors to seek out riskier alternatives, which could be additional fuel for the stock market.

All of the major averages are now well above their January highs, which formerly represented overhead resistance. Not only have the January highs been taken out, but it has been accomplished with authority. The most bullish thing the market can do is go up, and that is exactly what it has been doing over the past several months.

There is no question that the rally is unsustainable. At some point, we are going to get a pullback. But with all that money on the sidelines and our models in a positive mode, we expect it to come from still higher levels.

Despite the incredible run-up, we have not reached that phase of the bull market in which the bears throw in the towel and start buying with reckless abandon.

This phase can often be identified by the number of times that the Standard & Poor’s 500 gains 2% or more in a single session. Since our July 21st buy signal through the present, the S&P 500 has had only three trading sessions in which [it] posted a gain of 2% or more—July 23rd, October 29th, and November 9th. It has now been 112 trading sessions since the last 2%-plus up day.

We consider this to be an ideal environment. It is interesting to note that during the last bear market in which the S&P lost 57% between October 9, 2007 and March 9, 2009, there were no less than 39 2%-plus up days.

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