Investor Allocations at Historical Lows

The present reading puts us 15 % under the 21-year historical mean. This reading is significant because it mirrors the readings seen at other major lows such as 1987, 1990 and 2002. Now while it doesn’t mean we bottom tomorrow (though we could) it does mean stocks are certainly closer to the end of the decline rather than the begininning.

Liquidity plays a major role in the future direction of stocks because it gauges available — as well as future — buying power. When investor allocations to equities are very low this is bullish for stocks as it suggests investors (not cash) have moved to the sidelines in droves.

This does two things: Low equity allocations suggest investors have sold in droves, thus reducing much of the selling pressure from the market; Second, the low equity allocations suggests a large buildup in sideline cash (ie. new buying power) from many individuals.