March 4, 2008
When this much money is sitting on the sidelines, the slightest move up gets a lot of people scurrying to jump into the market for fear they are going to miss a rally. The reverse is also true, down days and everyone panics. Since no one knows when or if the markets are going to take off or crash on any particular day, the only thing you can do is think about why you are in the stock to begin with, is it still a stock you would want to own today, has anything changed with the company, its products, its markets, its management, its philosophy??? I think about all the years I have been sitting with GE stock. The company keeps getting stronger, the earnings keep rising, the management team is about as good as it gets, its marketshare gets better and better and the stock - has done nothing. But I bet if I sold tomorrow, it'll probably hit new highs! That's why I still hold on to it - so its my fault if you also have GE and have not made a dime. But it's a large cap stock that seems to be unloved, but I know it's not going out of business and its earnings are real. One day my ship will come in. I hope I'm not on a plane...
Cash Hoards Could Unleash an Explosive Market Rally
By Ian Davis
Are you scared of the stock market right now?
Most investors are petrified...
Here's how I know. When the stock market is soaring, investors take on debt. They do this in order to buy more stock than they could otherwise afford. They assume the gravy train will continue into the future, and they want a larger piece of the action.
Conversely, when the stock market is weakening, investors buy less stock than they can afford, leaving some of their account in cash.
Right now, we are in the latter situation.
Investors have more pent-up buying power than any other time in the last 16 years.
You can calculate investors' buying power easily. The New York Stock Exchange reports the total balance of margin debt and free credit for its member organizations (which are basically the organizations that trade on the NYSE floor). You can calculate buying power by subtracting the total margin of debt on the exchange from the total free credit that is in cash accounts and margin accounts.
As you can see from the following chart, investors are sitting on more buying power than any other time in the history of the data set.
Investors Are Sitting on a Ton of Cash 
The chart shows investors were cash-poor throughout the '90s bull market and cash-rich during the dot-com crash.
You can also see that peaks in cash coincide with short-term bottoms in the stock market. Similarly, peaks in debt correspond with short-term tops in the stock market.
So what does this mean for you, the individual investor?
When investors are poised with lots of cash, a small rally can turn into an explosive one in short order. I believe we are entering that situation right now...
(Please note: The most recent data available is from January 1, 2008. However, the NYSE composite index is currently 7.9% lower than it was on January 1. So I think this pent-up buying power is still waiting to be unleashed.)
The key question remains how will we time our jump into the market to take advantage of the rally and exit safely before the bear market reasserts itself.
Until next time,
Good investing
Ian Davis
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