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Investors’ Extremely Low Cash Balances Raise Red Flags for Stock Market

Investors’ Extremely Low Cash Balances Raise Red Flags for Stock Market.  SentimenTrader points out that average cash balances across a wide swath of investor types have fallen to  record or near-record low of less than 7%. That’s the second lowest in 40 years. In fact average cash balances among mutual funds is at a record low of 2.5%. Given the combination of the stock markets’ record advances and low interest rates, it would seem logical. although not necessarily rational that investors should be so heavily invested. Why not rational? That’s because the low cash balances leave investors virtually no cushion against potential market volatility.  Put another way, the low cash balances mean investors, who historically are wrong, have become overly complacent. That’s despite numerous indications the market is overbought.  The chart below shows how low cash balances often precede major cash market declines.

Investors’ Extremely Low Cash Balances Raise Red Flags for Stock Market
Investors’ Extremely Low Cash Balances Raise Red Flags for Stock Market.

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Brad Lamensdorf

Brad Lamensdorf, the founder and portfolio manager of Active Alts, is a principal and co-manager of the AdvisorShares Ranger Equity Bear ETF. He previously managed a long-short investment partnership from 1998-2005 under the name Tarpon Capital Management. Earlier in his career Mr. Lamensdorf was an equity trader/market strategist for the Bass Brothers’ trading arm. He managed a short only portfolio in addition to co-managing a $1bil hedging program. He also served as in-house market strategist for the entire internal and external network of Bass Brothers money managers.

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