Chris Rowe

Deciding When and Where to Invest in 2010

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Will the bull market continue through 2010? Maybe. But you shouldn't expect anything like the spectacular run-up the major indices made in 2009.

All but one of the 14 previous bull markets since 1932 survived into a second year, averaging 12.5% gains during that year. But that doesn't mean this bull market will move in a straight line up in 2010. In fact, we may not see an advance at all.

I recently went over the serious potential bearish pitfalls that are in the cards, but this week I want to give you the "bull side" of the argument for 2010, because it's important to understand the different possible outcomes. But, as always, you should trade based on what's going on AT THE TIME.

'Envious Money' Still on the Sidelines

There is a LOT of cash still on the sidelines and the return you get on that cash, say in a money market account, is close to nothing. But it's not exactly scared money like it used to be. "Envious money" is more like it. Most individual investors didn't participate in the rally off of the March low. It's been a low-volume rally, mainly in larger companies. 

You may recall a report from Morningstar I mentioned a couple of months ago saying that, for the first eight months of the year, out of the top 10 funds that saw the largest inflows of capital, nine of them were bond funds. This shows the lack of participation from individuals. 

At the March 2009 bottom, money fund balances peaked at $3.7 trillion. JPMorgan (JPM) said that since the March bottom, $560 billion has flowed out of money funds, leaving $3.2 trillion still in money markets. So, that leads us to believe there is a lot of potential for money to come flowing back into the stock market after a correction. Or, at least, it will likely move into one of the financial markets. 

To further back up the idea that so many investors are waiting for a correction before jumping in, I'll point out that Investors Intelligence polls more than 200 financial newsletter writers and investment advisers on whether they are bullish, bearish or looking for a correction. 

The recent poll shows advisers who identified with "looking for a correction" increased to 35.1%, the second consecutive week with their highest number since March 1992, when they were at 35.3%.

What about liquid assets other than money markets? There are other cash or "cash-like" stockpiles out there like cash deposits, CDs, etc. The U.S. household sector currently has approximately $7.7 trillion in liquid assets, which is even higher than the previous peak in the 1980s.  

What's Everyone Waiting For?

And how has the market moved so much higher off the March low with all that cash on the sidelines?