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  What Happens When Cash is the Best Asset

January 17, 2008

 

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This is an abbreviated sample of a comment posted for subscribers

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There are no shortage of breadth indicators available that help us to monitor the health of the market.  By watching how individual stocks are performing, we can get a handle on whether broad equity averages like the S&P 500 are masking underlying weakness.

 

Common breadth indicators like the advance/decline line and the percentage of stocks over a certain moving average are written about extensively, so we're not going to touch on those.  On the site, we try to look at breadth in a slightly different way, via sectors or even within Rydex mutual fund asset flows.

 

Another type of breadth indicator we've written about in the past concerns the Fidelity Select line of mutual funds.  This indicator was originated by the esteemed analyst Walter Deemer, who compared returns in each of the Select sector funds to the return on cash.

 

We use a slightly different twist on the data, by looking at quarterly returns in each of the 42 funds, and comparing each of them to the average return on 90-day T-Bills during that time.  It has been most effective as a contrary indicator, meaning that when a vast majority of the funds are out-performing cash, the market as a whole has tended to take a breather.

 

We're facing the opposite situation today.  Not one of the Select funds we monitor has beaten the somewhat paltry yield on T-Bills - a truly horrid set of circumstances.  What's worse, this has been the case for each of the past 10 days. 

 

 

The only silver lining could be that things are so bad, they have to get better.  Well, they don't have to, but they tend to.

 

The table below shows every other time since we have data for the funds (dating back to 1986) when 0% of the Fidelity Select funds managed to out-perform cash...

 

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