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Amateur Investors Weekend Stock Market Analysis (2/27/10)

http://www.amateur-investor.net/Weekend_Market_Analysis_Feb_27_10.htm

For those that don't believe the Federal Reserve has any affect on the market the chart below shows how they can influence it by adjusting the Fed Funds Rate. Each time the market has gone through a correction of varying degrees the Fed Policy has been to lower the Fed Fund Rates by a substantial amount (points A to B) which has always been followed by a decent rally (points C to D). Also notice from the early 1980's through the mid 1990's that the long term trend in the Fed Funds Rate was to the downside which had a positive impact on the market as a Secular Bull Market evolved. However keep in mind the Fed Funds Rate was over 18% in the early 1980's so the Federal Reserve had a lot of room to allow for the rates to drop through the 1990's. Right now the Fed Funds Rate is basically near "0" so there is no room to cut the rates like what we saw back in the early 1980's when rates were at all time highs.



With the Feds Fund Rate at historical lows two outcomes are likely. Either they will stay at extremely low levels for an extended period of time like Japan has done the last several years or the rates will begin to rise.

As you can see keeping the rates low over a long period of time hasn't helped Japan's Market as it has remained in a Secular Bear Market for the past 20 years and lost over 80% of its value. If Japan is lucky it may be finally developing a longer term Double Bottom pattern although the one in the early to mid 1990's failed to follow through.



Meanwhile if the Fed Funds Rate begins to rise over a long period of time that may have a negative impact on the market like occurred from the mid 1960's through the early 1980's as the Dow got stuck in an extended trading range.



Meanwhile another observation involves the amount of Cash Mutual Funds actually have on hand as reported by ICI.org on a monthly basis. This data has been tracked since the mid 1950's. The average amount of cash held by Mutual Funds has been around 6.9%. Prior to the beginning of the last Secular Bull Market from the mid 1980's through the late 1990's Mutual Funds had a lot of excess cash on hand on a % basis and by 1991 (point E) they had nearly double the long term average.

Meanwhile notice over the past 10 years the amount of Cash on Hand has been below the longer term average (white line). Furthermore notice how fast Mutual Funds have burned up their Cash (points F to G) in the past year as the Dow has rallied with the Cash Levels dropping from 6% to 3.6% in just under 12 months as the previous all time low made in 2007 (point I) is getting closer. Keep in mind it took nearly 7 years for the % of Mutual Fund Cash to drop from 6.5% to 3.5% from 2001 through 2007 (points H to I) prior to the late 2007 top and 10 years to go from a high of 12% in 1991 to the low of 4% in 2000 (points J to K) as the Dow peaked in late 1999. Furthermore going even further back to the early to mid 1970's Mutual Funds went through a lot of there Cash in a short period of time as well (points L to M) right before a significant market top occurred. Thus the big question is will the Mutual Funds have to rebuild their Cash Levels before another Secular Bull Market can develop and will a longer term trading range occur like we saw from the mid 1960's through the early 1980's?