September 30, 2014

10 Reasons to raise cash levels

Unlike others, I don't approach my investment conclusion with self-confidence. While I am explicit in the reasons for my caution ("Sell Strength"), these are my strong views. But I may be wrong, as the only certainty is the lack of certainty. That is why I always qualify my views and average into positions:

-    A market bounce is possible at any time, as the market's character has changed.

-    We are in a market without memory from day to day. Mr. Market will be increasingly volatile and unpredictable. Opportunistic trading may trump buy-and-hold investing.

-    A rally should be sold, as expressed in "Sell Strength." (Short-selling is not for many, but most should consider erring on the side of conservatism.)

-    The market's internals have been deteriorating for months (a constant theme of mine). The accumulated advance/decline line (breadth) has been weakening, the Russell 2000 Index's drop has presaged today's schmeissing, and the number of new highs has contracted.

-    The erosion in the high-yield market is an important and negative development.

-    The world has grown increasingly unsafe. This is not likely to change for years.

-    The market's multiyear advance has benefited from the rising role of high-frequency trading and momentum-based strategies. A downturn could have the opposite effect in a herd-dominated investor base.

-    Global economic growth is moderating and the European economies are problematic. In its extreme, the leveraged European banks represent systemic risk.

-    Before today's schmeissing, few investors envisioned the possibility of a major market correction.

- Our political leaders have failed us. The burden of growth now lies on monetary policy, which is losing its effectiveness. The Fed's zero-interest-rate policy (ZIRP) is not a permanent condition.

Adding up these 10 conditions, I conclude that most investors should maintain above-average cash reserves.