When Is Fund Manager Cash Balance Extreme?

BAML publishes a monthly report on fund managers' cash balances. On the Weekly Market Summary, you will see that we look for extremes above 5% (bullish) and below 3.5% (bearish). 

Below are two charts from 2001-2012 from Short Side of Long. This excellent article on this subject is here. 

In the first, the lines are for cash above 5%. The most recent signal was at the June 2012 low. Even in 2008-09, this turned out to be a very useful indicator of extreme panic. A Fat Pitch.

Buy When the VIX is High (Above 40)

Having just shown that the best risk/reward is when the VIX is below 20, you'll find a surprisingly good bounce in $SPX when VIX spikes above 40. In the chart below, from 1996 to 2012, there were 5 great buying opportunities when VIX over 40. Unfortunately, buyers using this strategy were destroyed  in 2008. So there you go: it works 83% of the time.

A great chart from Short Side of Long below:

Best $SPX Risk/Reward When VIX is Under 20

The best risk/reward in $SPX occurs when VIX is under 20. Average monthly returns (1.5%) and the maximum downside (-4.4%) occur during these periods. On average, monthly returns are positive 77% of the time. 

For comparison, when VIX is 25-30, average monthly returns drop (0.2%), maximum downside doubles (-9.1%) and the monthly returns are positive only 52% of the time. 

It gets worse the higher the VIX. A nice report can be found here with a the summary table extracted below.

McClellan: 40 Year Cycle in DJIA

A chart from Tom McClellan showing the DJIA 40 year cycle. Each point on the chart is compared to the period 40 years prior. According to this cycle, a big bottom is coming up in 2014 following a big top this year.

Sentiment Expressed in the Press

Sentiment expressed in the press is always gloomy at market bottoms. Here are two examples. The first is from December 2011. "Our decade from hell will get worse in 2012." $SPX rose over 20% in the next 12 months.