All in: Investors' cash levels hit record low

Published Tue, Aug 4 20156:00 AM EDT

It's hard to poke holes in this bull market. The usual bear arguments trotted out—a Fed rate increase, slowing China economic growth, an increasing dollar—just don't seem to stick as the bull market continues marching higher. However, one worrying contrarian statistic highlighted by Sentimentrader.com is making the rounds on trading floors and seems like a legitimate concern given its historical track record. The web site shows that the amount of cash held by U.S. mutual fund managers amounts to a paltry 3.2 percent of their portfolios, a record low according to the data going back the 1950s. Note the low levels at the start of the technology bubble in 2000 and the housing crisis in 2007. Source: Sentimentrader.com Sentimentrader.com's President Jason Goepfert said: "The biggest concern is that there is no buffer for a selloff. If fund companies get a sudden rush of redemptions among investors, and they don't have a good cushion of cash to meet those redemptions, then they will likely have to sell part of their holdings. That means more selling pressure, which means more redemptions, which means more selling, cont'd. It can be a vicious cycle." So basically, there's no money left to buy stocks to keep this bull market going. And worse, any drop in stocks could cause a domino effect of selling. Unless the public starts putting more money into mutual funds, but that's not happening. Investors pulled more than $1 billion out of U.S. equity funds last week according to Jefferies. Another statistic which shows how managers are putting it all on the line right now is the surge in borrowing on margin to buy stocks. Total margin debt is now 3.1 percent of U.S. GDP, the highest ever, surpassing peaks before the Dotcom bubble burst and the housing market bubble collapsed, according to Alan Newman of the Crosscurrents newsletter . Source: Crosscurrents "Make no mistake, this is a veritable stock market mania, the third in 15 years," wrote Newman in his latest letter. "Given stock prices were cut in half in two of the worst bear markets ever from 2000-02 and from 2007-09, we believe our 'danger' appellation is well deserved. At well over 3 percent of GDP, the current reading likely represents a condition so emphatically excessive that we should expect not only a bear market but possibly a financial crisis to ensue." So not only have money managers depleted their cash coffers to buy stocks, they are borrowing record amounts of money to buy even more. Read More Dan Loeb's simple strategy destroys the market To be sure, there is one source of bull fuel yet to be tapped: the bond market. "The missing piece is asset allocation," said Bradd Kern of investment firm Armored Wolf. "If rates rise, investors will shift out of bonds and into stocks. Bond fund inflows have soared since 2009, while equity flows have only recently started to rise." But to that point, what happens if rates remain low and stocks sell off at the same time? That will be a problem as there may be no buyers left.

Traders work on the floor of the New York Stock Exchange.

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It's hard to poke holes in this bull market.

The usual bear arguments trotted out—a Fed rate increase, slowing China economic growth, an increasing dollar—just don't seem to stick as the bull market continues marching higher.

However, one worrying contrarian statistic highlighted by Sentimentrader.com is making the rounds on trading floors and seems like a legitimate concern given its historical track record.