The above chart indicates the amount of cash investors have held as a percentage of the Wilshire 5000 at any point dating back to 1974. First, this chart confirms the belief that people invest money when they feel good, and pull money out of the market when they are fearful. Look at the 1990s. The percentage of cash not invested in the market steadily decreased throughout a decade where returns were constantly high. Consequently, in percentage terms, more money was invested in the stock market right before the crash of 2000 than during any other period studied. Additionally, you can see the amount of money pulled out of the market during the last six months or so, even though the majority of damage had already been done. Still, because of fear, people agreed to sell and lock in their losses.
Second, and perhaps more importantly, you can see the large amount of cash that is currently sitting on the sidelines. The first thing I think of after looking at this chart is the large amount of funds that will likely flood the market once investors start feeling better about the state of the economy. Logic would figure that once the market finally develops some momentum, this factor could lead to a healthy, extended rally.
One more chart…
This chart illustrates that historically, the market has performed better when the average price-to-earnings ratio of the S&P 500 was low. As of March 30th, the S&P 500 had a P/E ratio of 13.74. You can see that the ratio is moving further toward the cheap side of the continuum. This could be yet another indicator that the market is getting closer to a bottom.