1) Complacency – Complacency levels are getting extremely high as the fears of 4 weeks ago quickly shift to greed.  This has been most notable in the very bullish posturing of US portfolio managers (see here) and the Volatility Index.  Portfolio managers are now sitting on record low cash levels and haven’t been this bullish since the 2007 highs and the January highs.  The VIX has plummeted back to levels just before the January sell-off began.  The VIX has now fallen in 17 of the last 19 sessions.

2) Catalysts – Q4 earnings season is now officially over and Q1 reporting doesn’t start until the middle of April.  The next few weeks could be characterized by a market that is lacking a catalyst to move higher.  Aside from a Fed meeting on March 16th the economic calendar is relatively light over the next few weeks when compared to the last few months.  Markets need positive catalysts to drive prices higher.  Without a catalyst to cling onto the market could drift or slide lower on any surprises.

3) China – While most equity markets have rebounded substantially over the prior month the Chinese market remains well off its highs and has actually made a series of lower lows.  In addition, the Chinese market remains below its 200 and 50 day moving averages – still in bear market territory based on a purely technical definition.  China has been the engine of the global recovery and Chinese investors are becoming increasingly concerned about the durability of the recovery.  If Chinese stocks continue to trend lower they will almost certainly pull all markets down with them.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • van
  • LVG

    a stall in the s&p at these levels would create a double top. eerily similar to the 2007 market when complacency reigned.

  • chris

    “Markets need positive catalysts to drive prices higher.”

    well that depends on your market view. another side (yours truly) would say that given the past year, no news will be good news until we get the actual good news that i (and i think you too if i read you correctly) expect will be coming at end of Q1. i understand you are short (or at least you said you were going short last week), so it would be normal for your book to shade your bias. but i find it to be a low risk/reward bet to look for a short term drop in the market before another expected round of market-supporting good news comes in.

    van’s link above points out that while equity mutual funds are low on cash. there is a record $3T in money market funds earning .01%. i may be wrong, but i believe this number goes lower before it goes higher.

  • Piyush

    Hey Chris,
    Actually I have never understood this fallacy of $3T in money market funds. Just to understand, if someone has to buy that means someone will sell. Again that money will go into money market funds. So the $3T will remain the same unless there is new Issuance or someone goes and spends that money.
    Please could you explain this to me. Just trying to understand this phenomenon. Never understood it clearly.

  • http://www.pragcap.com TPC

    I’ll jump in here. Chris, feel free to add whatever comments you might have.

    Price is a function of psychology. Not cash on the sidelines. In theory, new money moving into the market would move price higher, but that assumes that all buyers are stupid and simply hit the asking price on the board. I don’t think that is true. I know that the majority of my purchases are executed at the bid – the price I want and someone else is effectively selling me their shares. Net net, there is no change in the value of money in the system though.

    Of course, in a time of heavy government spending and low interest rates there is supposedly more money in the system chasing after fewer stocks. But again, that “money on the sidelines” myth assumes that all buyers are dumber than all sellers and they hit the asking price. That just isn’t so.

    Psychology drives price. We are in a bull market and people are chasing prices higher. In the bear market investors were eager to sell and hit the bids. It’s almost entirely a psychologically motivated event.

  • chris

    tpc, i actually think that investors of all stripes follow allocation metrics, whether overt or implied. i know i keep 20% cash generally as a sanity buffer, although this has been as high as 100% and as low as 10%. my point is that i infer from $3T in money markets that investor cash allocation is high; i think that as the market avoids heartache, as i think it will, over the next 3-6 months, that cash allocation % will go down, and so equity funds will have more firepower; i also think that as rates go up at the margin over the next 3-6 months, returns in bond funds, which also are at long time highs both in terms of returns and in size, will moderate, which will also at the margin increase equity fund firepower. so i think there will be more money chasing stocks. i think it is that simple.

  • http://www.pragcap.com TPC

    You’re misunderstanding the chart. Those charts are always portrayed as cash as a % of equity market cap. The amount of cash in the market never changes (except when new money comes in). The market cap is a moving target though because equity prices expand and contract. So yes, cash as a % of market cap changes, but that is a function of psychology – not actual money in the market.

    I’ll simplify this to the extreme. When you buy 100 shares of SPY at 114.50 you are actually selling your money market (or your broker effectively is) and you are buying the fund. Subsequently, the person who you bought the fund from is selling their stocks and their broker is effectively buying the money market. There is no change in cash in the market. You simply swapped holdings.

    That indicator is nothing more than a reflection of current psychology. It is generally only useful at extremes. Now is not one of those times.

  • Anonymous

    Thats what I always thought so. Thanks for the explanation. But this argument keeps coming up so many times, and you see so many articles talking about cash on the sidelines, which I always fail to digest.

  • chris

    so just to add the final point of my KISS analysis, as investors devote more money to equity, more money goes to equity funds, which will invest this additional money into equities (that’s their job); on a micro basis, the seller gets cash out when the buyer buys; on a macro basis, more buyside supply of cash, the higher equity prices. the seller’s cash gets redeployed back into equities in the equity fund, rather than going back into a money market fund (except as a temporary sweep).

  • http://www.pragcap.com TPC

    read my example above. Cash in money markets is not “firepower”. It just so happens that when investors are most fearful, the level as cash as a % of market cap has expanded because equity prices have contracted.

  • http://www.pragcap.com TPC

    You hear this bullish argument on CNBC every single day. Literally. From top notch professionals. It’s scary that these guys don’t understand how the mechanics of price change actually works.

  • chris

    couldn’t disagree more.

    there is a big difference between the cash that my equity fund manager holds in a money market fund (i have allocated that money to equities and it is the equity manager’s job to buy equities with it), and cash that my wealth management advisor holds in a money market fund (that is staying there because my equity fund manager can’t access it). if you ignore the functional qualitative difference between these different cash allocations, you are over-thinking it.

  • chris

    again, big difference depending on whether my equity manager can touch it. cash in a bond fund and cash in a money market fund that i put there as an allocation of cash is different than cash that an equity manager parks in a money market fund. gee, this is really simple stuff guys.

  • Gary

    Note for Chris…

    I laughed out loud when I read you are expecting ‘good news’ at the end of Q1.

    Clearly, your head is buried deep in the sand, and you must take your news from CNBC.

    There is nothing to loof forward to but bad news. The bad news is already coming in, but the pumpers distort them, or hide them just a little. Look closer, it is clear to see…credit is still contracting, spending is headed even lower, housing still in the mire, govts in the mire, companies are struggling at the top-line (bottom line too in many cases), and liquidity is about to be drained from the system.

    This is your last chance to get out of the way of what 2010 will deliver.

  • chris

    thanks gary, i am cheered that you care.

  • http://www.pragcap.com TPC

    I thought my example was really simple, but I’ll just let the good Doctor explain it for you. This is really simple stuff Chris and you are the one who doesn’t get it. You can take it up with the PhD from Stanford from here:


  • Octopus

    “Cash on the sidelines” is one of the most abused and misunderstood terms on financial mkts…

  • chris

    gee tpc, thanks for the hussman link; he really is a stanford phd? actually, he proves my point:

    “… and that there’s no such thing as “idle cash on the sidelines.”

    That last one isn’t easy to grasp. After all, you can look at your own brokerage account and say – “look right there at that cash balance. There it is, on the sidelines, just waiting for me to put it into the market.”

    But if you look more closely, what you really have is an IOU. It might be a very liquid one, like a money market fund that holds T-bills and commercial paper, but it’s still an IOU. See, your “cash on the sidelines” isn’t sitting there idle, waiting to be put to work. The fact is that it has already been put to work.”

    my whole point is that it depends how your cash is being put to work. cash/fixed income/equity allocations are very important. if you don’t agree with this, you are misunderstanding markets. cash in a bond fund or money market that is there because of investor allocation is very different from cash in an equity fund that is there because of investor allocation. to use the analogy, these are different sidelines.

    really simple tpc, if you don’t get this, i guess you must be reading too many phds.

  • Anonymous

    Thanks for the link, van. Good stuff.

  • SS

    You don’t get how it works Chris. That firepower you refer to is always there. It is always in the market. When you buys stocks from someone you are both swapping cash for stock. There is no net change in the amount of cash in the system. Cc

    Stop trying to back pedal your way out of looking like an idiot.

  • Anonymous

    Think I’m on Chris’ side on this one……

  • chris

    now you are calling me an idiot. touch of class tpc.

    “That firepower you refer to is always there. It is always in the market.”

    there are multiple markets. money in a bond fund will never get invested in equities. money that an investor maintains in a money market fund because he is negative on equities will never get invested in equities. money that is an equity fund will get invested in equities even if it is temporarily invested in a money market fund by the equity manager.

    if you guys don’t understand the importance of allocations, you are overthinking things. sounds to me like there are a lot of perma bears on this blog who are getting just a bit touchy because the equity market is not following their world view. i enjoy it when i look at the scoreboard.

  • chris

    sorry tpc, i just now noticed that SS posted that idiot remark instead of you.

  • http://www.pragcap.com TPC


    I didn’t call you an idiot. The comment section here is always pretty civil so let’s not overreact.

    Your implication is that cash on the sidelines provides firepower for a move higher. As if investors move out of cash and into stocks. But that’s not how it actually works. The transaction nets to zero.

    Someone has to sell your stocks to you. What do you think happens to their money when they sell the stocks? It goes into the money market that you just sold.

  • chris

    “The transaction nets to zero. Someone has to sell your stocks to you. What do you think happens to their money when they sell the stocks? It goes into the money market that you just sold.”

    last time; i see huge qualitative differences for the equity market depending upon whether that money market account is for a equity manager who is seeking to redeploy cash back into the equity market, or a money market account for a bond fund manager or for a cash investor who is staying in cash.

    there have been a net outflow of cash from equity funds and a huge inflow of cash into bond funds and money market funds. i think this will gradually reverse over the year as the equity market performance convinces more investors to be slightly less risk averse.

    any stock transaction nets to zero, as you say, on a micro level, but you have to look at the macro level…cash that wants to be equity is a big difference from cash that wants to stay cash or be a bond.

    my final comment on this point as this is getting tiresome. if any of you think i am an idiot for believing this, go right ahead.

  • van
  • http://www.pragcap.com TPC

    I think what you’re missing is that there is always a fixed amount of equities, bonds and money markets in the overall pool. It certainly changes over time (new issuance, etc), but in general it is relatively little changed in any given day, month or year in the grand scheme of things. All buyers and sellers of these assets do is interchange them. Ownership changes and price changes based on psychology.

    When you sell your stocks to buy a bond fund the transaction works like this: A buys stock from B and B buys cash while A sells cash. B then buys a bond from C who buys cash from B. All that happened here was an exchange of instruments. Nothing more.

    You all reallocated based on your psychology at that time.

    New issuance is a separate matter, but that’s not what we’ve been discussing.

  • AWF

    Too much pud pulling in this thread?

    This article is about :

    Complacency—Live to Thrill Junkies–this is not your type of market.
    Of course “No/Limited Short Selling” does count.

    Catalysts—we will get retail sales this week
    Probably not good by the February weather–count on the rebound for March

    China—I think they want to sell goods to the US–not the other way around.
    Exchange rates are itch for these guys.

  • DanH

    Seriously, talk about off topic….

  • JZ

    Just wasted 7 minutes of life I can’t get back reading the comments

  • Octopus

    Zero sum game: another good example is futures markets

  • Joe 401k

    I appreciate these warnings. The market could keep going higher, but I have to keep reminding myself not to be motivated by the “fear of not making money”.

    I took a little money off the table today, and I won’t regret doing so, even if the rally continues.

  • ike tossia

    this is not about complacency. its about big shorts covering b/c they’re being told to by the clearing agent/broker and up they go. this MKT’s great. just don’t argue with too much stock… the quants are getting better and better. there’s no prices any more. its just numbers moving. who though we’d be back @1140+- so quick ? its great.