The comments below were provided by Kevin Lane of Fusion IQ.

Liquidity is a powerful tool. Given that liquidity goes hand in hand with sentiment, liquidity tends to be at its highest when equities are at their lows and investor sentiment is extremely dour; conversely, liquidity tends to be at its lowest when stocks are at their highs and investors are exuberant.

As seen in the chart below, the recent correction saw equities get back to almost a 5.00% allocation above the mean allocation. Typically this is an area vulnerable to shallow corrections, hence it was not a surprise to see a minor pullback recently.

Currently individual investor allocations towards equities are slightly below the mean, which puts us in a zone where, though reduced, buying power is still ample. With buying power relatively strong and the AAII Bull Sentiment Survey still at a relatively neutral reading, it’s hard to see a big correction here.

What may be a likely scenario is as follows: the market continues to move up and investors, even the non-believers, start chasing stocks, putting their last bit of buying power into the market.


Source: Kevin Lane, Fusion IQ, 11 March 2010.

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