No One’s Talking about This… But It Could Be BIG for the Market

OK…before I get into the ‘whys’, I need you understand the ‘what’…

Right now a MAJOR trend-change is taking place in the market.

I believe this because three unique and independent indicators are all flashing together.

This rarely happens.

It’s only happened twice in the last 24 years.

Each time the markets embarked on a two–four year tear, making fortunes for those who knew how to trade it.

Well I believe the same opportunity is in front of you today.

To explain, I want you to read a headline…

You’ve probably seen ones like it before. And I’m sure you’ll see plenty like it in the future. They’re an all-too-regular feature in newspapers and across the internet.

Here it is…

‘Sharemarket is on a precipice’

I believe you need to be wary of headlines like this. They often drum up fear, unnecessarily keeping people out of the market. Waiting for disaster can be an expensive strategy.

Now have a read of the opening paragraph…

Do not sell. Do not buy. Hold whatever shares you have. Button up your wallet.

This dire article isn’t from a fringe website — it’s from the mainstream press. The story appeared in The Sydney Morning Herald on 13 November 1994.

Frozen with fear, the writer appears to be bracing for impact.

A primary concern back then was rising US interest rates. There were also fears that a congressional election at the time would derail a key trade deal. It wasn’t all that different to today.

Check out this recent headline…

‘Be afraid, be very afraid as US readies to raise interest rates’

South China Morning Post, 12 December 2016

Little has changed in 22 years. The headlines are as ominous as ever. But, rather than alerting you to a growing storm, I believe they can distract you from what’s important.

Over the next two weeks, I’m going to show you three indicators. You’re unlikely to find any of these in the mainstream media. In fact, many traders are oblivious to their existence.

But first, I’m going to show you the dangers of conventional thinking. This is why you need to think critically about the reports you read. I want you to have the confidence to go your own way.

Step back in time

Have a look at this chart…

Source: BigCharts
Click to enlarge

This is a chart of the Dow Jones Industrial Average in November 1994. It had been a tough 12 months. Markets were on edge, and many people were expecting conditions to worsen.

I have an excerpt for you to read. This will give you a feel for the prevailing mood. The writer is respected economic journalist Maximilian Walsh…

While there are, as always, a number of factors contributing to the bearishness of the market, the significant and worrying aspect of this latest bout of uncertainty in the global equity markets is that it portends a shake-out in the largest bubble in the global financial market, namely US mutual funds.

The Age, 23 November 1994

Would this fill you with confidence? Probably not. Many people would take a step back from the markets — it would make them less willing to act on opportunities.

Let’s wind the clock forward two years…

Source: BigCharts
Click to enlarge

The Dow rose over 80% in the two years after the November 1994 low. Few people saw this move coming; in fact, many were looking the other way. This is how a bearish bias can cost you dearly.

So, why did this bull market take many smart people by surprise?

I remember this time well. Memories of the 1987 crash were still fresh, and many traders (including myself) were worrying about the prospect of an even bigger selloff.

But here’s the thing.

The overall trend in global stocks was up. It had simply paused for 12 months following a period of strong gains. Many people mistakenly took this as a sign of trouble ahead.

I believe stocks are in a similar position today. And, like 1994, many people are looking the other way. This is a classic setup, in my opinion, for a big advance in global stocks.

A triple buy signal

I have three indicators to show you. Chance are you’ve never seen these before.

Now, I can’t show you all three indicators today. But I won’t keep you in suspense. The upshot of this is that I believe markets are set to boom.

You see, something rare is currently happening. All three indicators are flashing BUY. The last time I saw this happen was in 2009 — near the GFC low.

OK, let’s get started.

The first indicator is hugely important. It shows you what the professionals are doing.

Have a look at this…

Source: Bloomberg
Click to enlarge

The chart is by Bank of America Merrill Lynch. It shows the average cash balance for 213 fund managers. This group manages over US$563 billion — these are the big hitters.

I’ve added my own lines to the chart. Firstly, I’ve updated the data through to January. I’ve also added the green circles and the dashed line with the arrow.

This chart is fascinating. The cash balances mostly swing between 3.5% and 6%. The low readings are when managers are largely bullish, while higher numbers occur when they’re fearful.

The chart lists five keys events: 9/11, Lehman’s collapse, US debt ceiling, Grexit fears and China’s currency devaluation. The peaks mark the end of stock market selloffs.

The most recent peak was at 5.8% — this was the eve of the US election. Stocks were near record levels…but people were fearful of the potential for trouble.

Now have a look at the green circles. Notice how an initial sharp decline often leads to much lower cash levels in the months ahead. I believe something similar is happening now.

The key takeaway is this: Cash levels are dropping, and money is flowing into the market. This is a tailwind for equities…and there could be a lot more cash to come.

Let me show you another chart. This time, I’ll pair the graph of average cash balances with a chart of the All Ordinaries.

Check this out…

Source: Bloomberg; BigCharts
Click to enlarge

Study this chart carefully. I’ve added vertical lines to draw your attention to some key points.

What do you notice happens when cash levels peak?

I’ll tell you what I see: surging equity prices.

Cash balances in January were 5.1% (down from 5.8%). They are now trending lower from historically-high levels. I believe this creates the backdrop for a major advance.

Few people are talking about fund-manager cash levels. I haven’t seen much mention of this in the media. And that’s not unusual. These things often only become clear in hindsight.

But you’re aware of it — I believe this puts you a step ahead of most. I’ll show you two more indicators in tomorrow’s Port Phillip Insider. You’ll see the market in a way that few people can imagine.

Or if you don’t want to wait until tomorrow, click here and you’ll how to put all this into action right now.


Jason McIntosh,
Editor, Quant Trader

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