How You’ll Know When We’re in the Clear

The professional fortune tellers are at it again.

Today’s predictions are all about the future path of the markets. And they’ve got us swimming in an alphabet soup…

Will the recovery be V-shaped? How about L-shaped? Or will we be whipsawed by a string of W-shaped moves?

Jeez… It’s hard to know what to make of any of this.

Now if you’re like me, you know we can’t gaze into the future. But – and this is important – we can stack the odds in our favor… by using data.

Despite COVID-19’s unique circumstances, today’s crisis is no different than any other.

People are still people, after all. And we can use that to our advantage.

We just need to examine the right data to get a feel for how the recovery will likely play out.

Fortunately, one indicator has illuminated the path to every recovery in modern times. And what it says today is hugely important.

Let me explain…

Today, we’ll focus on an indicator that no one is watching. No one cares about it… because it’s buried in boring Federal Reserve data.

It’s called “retail money funds.” And it tells us what mom-and-pop investors are doing with their money.

Retail money funds are basically money market funds. You use them to hold cash in an investment account. And on the whole, they tell us if folks are excited to own stocks, or if they’re scared.

When mom-and-pop investors are scared, they hold more of their assets in cash, and retail money funds shoot higher. And as investors start to relax… so does the indicator.

This indicator is near an all-time high right now. Take a look…

On this chart, the gray bars are recessions. And as you’ll notice, Mom and Pop tend to put money to work as a recession ends. The number drops down when the hard times blow over.

Our latest gray bar isn’t showing on the chart quite yet. But at this point, darn near everyone agrees that the recession is already here.

The media is focused on trying to see the future. They’re asking, “How long will the pain last?” But as investors, we need to know the answer to a more specific question: “When is it safe to get back in?”

Well, our retail money funds indicator is still rising. Investors are still piling into cash.

Stocks may have moved up in recent weeks, but mom-and-pop investors are still running for the exits. History tells us we should expect more choppiness in the market until that changes.

Now, don’t go trading on this indicator alone. It can’t tell us exactly when the recession will end. Instead, it tells us whether the market action is in line with what mom-and-pop investors are doing with their money. This is a subtle but important distinction.

This indicator is simply a piece of the puzzle that can confirm what else is happening in the market. It’s how we’ll know if the answer is “not yet” or “all clear.”

Today, the retail money funds indicator tells us that mom-and-pop investors aren’t pushing the rally in stocks.

We won’t have the “all clear” signal until that changes.

Good investing,

Vic Lederman

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Source: Daily Wealth