Are Low Cash Balances A Danger Sign For Stock Market Rally?

Cash levels in investment funds have fallen steadily to near 10-year lows since March as fund managers increase their equity exposure to avoid underperforming rising market indices.

The diminished fund cash balances, combined with strong retail investor participation since the March low, raises questions about the source of additional capital flows to maintain the current rally.

Much will depend on maintaining the current ebullient expectations of investors. Investor sentiment, bolstered by low interest rates and other stimulus measures, remains vulnerable to disappointment if the expected pace of economic recovery is not met.

The potential for further market appreciation, and corrections, is a function of investor expectations in this sentiment-driven market. No amount of stimulus will offset the negative consequences should investor expectations turn negative.

The monitoring of sentiment will offer the earliest clues to trend changes in this market environment.

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