There are big cracks in a $7 trillion bull case for stocks to keep rising

• Bullish strategists often cite a record $6.9 trillion in money market funds as potential fuel for stocks.
• But the surge in money market cash might not be because investors are waiting to pile into stock.
• Potential dip buyers don't see any bargains just yet as the stock market declines on worries of fading economic growth.

Wall Street strategists in the last year have pointed to a key reason stocks are likely to keep pushing higher: the mountain of cash on the sidelines.

There's a record $6.9 trillion in money market funds, according to data from Bank of America. The theory goes that as soon as the stock market sees a compelling dip, investors will rush in, deploying their cash and preventing any downturn from spiraling out of control.

The idea gained steam in September when the Federal Reserve started cutting interest rates, which made holding cash slightly less attractive. The hope was that as yields on safer assets came down, investors would flock back to the stock market and spur a fresh run of gains.

But if the bulls are counting on a "wall of money" to rescue the stock market during its next big sell-off, they might adjust their thinking.

Here's why.

It's cash optimization, not risk reduction

The problem with this bif the bull thesis is that much of the increase in assets in money market funds is being driven by cash optimization decisions among investors, according to Jay Hatfield, CEO of Infrastructure Capital Advisors.

"During the period of rising money market assets, the level of M1, which included checking accounts but not money market assets, declined by over $2 trillion, indicating that the increase in money market balances was mostly optimization activity and not risk reduction activity," Hatfield told BI.

In other words, investors took advantage of 5% cash yields by transferring their money out of low-yielding bank checking accounts and transferring it into money market funds.

As long as cash yields don't crash to zero, it's unlikely that cash on the sidelines will seek other investment opportunities.

And even if yields did tumble to 0%, that probably means the economy is in trouble, in which case investors will probably not be eager to move their risk-free cash into a more volatile asset like stocks.

$7 trillion ain't what it used to be

According to Larry Tentarelli, chief technical strategist at the Blue Chip Daily Trend Report, the record $7 trillion in cash isn't all that impressive an amount, at least on a relative basis.

A data analysis by Tentarelli showed that money market cash has been steadily declining as a percentage of the S&P 500's total market capitalization even as the absolute number has hit records.

The data point is ultimately noise for Tentarelli, who thinks it should be ignored.

"I don't know that we should expect a sudden influx of cash into the equity markets from money market funds or that this 'dry powder' should be considered as either bullish (money ready to come in) or bearish (investors scared to commit)," Tentarelli said in an email to BI.

Strategic cash reserves do exist

To be sure, some investors sitting on cash are waiting to pounce on any significant stock market decline.

Ben Hunt, a retail investor from Kentucky, told BI earlier this month that he viewed the stock market as ripe for a correction and believed investors were exhibiting signs of exuberance. This key behavior has historically occurred right before a market peak.

"I plan to raise up to 50% cash in my portfolio before the end of the quarter," Hunt said, adding that he was already at 30% cash in his portfolio.

Hunt said he would use that cash to strategically buy a bigger decline in the stock market, "hopefully at lower prices."

In any case, dip buyers don't seem to see any bargains just yet as the stock market declines on worries of fading economic growth.

The S&P 500 and Nasdaq 100 are down 4.5% and 7.5% since their peaks in mid-February and have yet to stage any significant bounceback.