History shows that as a group mutual fund managers act like a typical crowd … susceptible to herding and group thinking.

They are most heavily invested near important market tops. And at market bottoms most of them turn bearish. That will never change … it’s human nature.

Hence it makes a lot of sense to look at what fund managers are doing — and take the opposite position whenever they are all doing the same thing. That’s why one of my favorite cyclical sentiment indicators is the average cash level of mutual funds.

Just look at the following chart. It shows the NYSE Composite Index on a monthly basis and the mutual fund cash level since 2005.