The stock market needs cash to fuel a rally.  The following chart shows the Mutual Fund Cash Levels vs. the S&P 500 from 1968.

1)       Major rallies occurred in 1974, 1982, and 1990 when the cash levels were greater than 11%.

2)       The market sold off in   1973, 1976, and 2000 when cash levels were below 4.5%.

3)       The old historical low was 3.9% in 05/1972. The market top was 12/1972 followed by a 46% decline. The next historical low was 4.0% on 03/2000 followed by a 43% decline. New historic lows of 3.5% were set in June and July 2007.

4)       Cash levels reached 6.5% in November 2000 but the market declined to a bottom in October 2002.

5)       Cash levels reached 5.9% in February 2009 then rolled over sharply.

6)       The February 2010 level was 3.5% compared to 3.6% in January and 5.7% in February 2009. Cash levels are in a very low range. The chart suggests the market is near a top as cash levels are again at the historic low of 3.5% that was set in June and July 2007. The S&P top occurred several months later in October 2007. The next decline should be similar to 2000-2002 and 2007-2009 (50-60%).

7)       Cash levels will have to move much higher before the secular bear market ends.

8)       Stock funds posted an inflow of $117 million in February, compared with an inflow of $16.92 billion in January.  Among stock funds, world equity funds (U.S. funds that invest primarily overseas) posted an inflow of $5.12 billion in February, vs. an inflow of $10.11 billion in January.  Funds that invest primarily in the U.S. had an outflow of $5.01 billion in February, vs. an inflow of $6.81 billion in January.