Investors' Incredible Shrinking Stock Allocations

Why low stock levels in portfolios could be a bullish sign.

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A chart posted on The Big Picture today (courtesy of FusionIQ) illustrates how much stock allocations have dropped compared with a 21-year historical average of 60 percent. Today, allocations are 15 percent less than that historical mean. Blogger Barry Ritholtz says that's significant because it mirrors the readings seen at other major lows in 1987, 1990, and 2002. "Now while it doesn't mean we bottom tomorrow (though we could) it does mean stocks are certainly in the eighth or ninth inning of the decline and not the third or fourth (however, as we know in baseball, even the last few innings can get ugly sometimes before the game ends)." He also points out that very low stock allocations are bullish for stocks because it means "investors have sold in droves, thus reducing much of the selling pressure from the market...the low equity allocations suggests a large buildup in sideline cash (i.e., new buying power) from many individuals."

Here's the chart:

http://www.usnews.com/dbimages/master/8028/GR_PR_081121newmoney.jpg

(Courtesy of FusionIQ)