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Jeff Saut: So How Much Cash Should Be in Your Portfolio Now?


Plus, investing ideas based on technical and fundamental analyses.

Last week I used this email from one of our financial advisors in one of my morning articles:

Hey Jeff, about a month ago I emailed you asking if the ~1750 low on the S&P 500 (INDEXSP:.INX) was a good buying opportunity. You emailed back saying -- "No, not yet" -- and ever since in your remarks you claim not yet. So now that we are well above that level, clients are asking why didn't we get in . . . what's your recommendation?

I responded with, "Okay, that's a fair enough question, but at 80% invested, it is not like we don't already have a lot of skin in the game." So my response was, "You should have 20% cash if you followed the advice in these missives. Moreover, I have suggested numerous 'investment ideas' for your consideration, most of which are followed by our fundamental analysts, over the past month (13 to be precise)."

However, this response to that same morning article from a portfolio manager says it better:
After listening to people since the beginning of this year recount what Jeffrey Saut is recommending, I am convinced that what you are actually saying is not being understood by a vast percentage of your readers/listeners.

Here's what I believe you are saying (let me know if I am the one who is misunderstanding):

I am a long-term bull, but believe in the very short term the market is a bit long in the tooth. As such I think that investors with a horizon of three years or longer should currently have 80% of their money invested in equities. Therefore, if you have, let's say, 50% of your money in equities, over the next few days to two weeks you should buy another 30% which would bring your allocation up to that 80% recommended level. Then, if things transpire the way I believe they will, we will deploy the other 10%-15% at a more opportune time. On the other hand, if you have 95%-100% of your money in equities, you should either sell 10%-15% of your portfolio over the next few days, or at least have tight stops on your positions.

What I believe many people hear you say is:

I am a long-term bull, but in the very short term the market is a bit long in the tooth. As such, if you currently have 0% or 30% or 50% of your money in equities, sell them because I believe the market is going lower. Then, allocate 100% of your money into equities once my short-term targets are reached. But in any event, do not invest any of your cash into equities at this time, regardless of your current stock/bond/cash allocation.

The reporting on your commentary must be very frustrating to you. If someone has none of their money in equities today, my belief is your recommendation would be to begin buying today as this may be the bottom for all eternity. But do it systematically as this also may be the top for the next few weeks.

I would also note that I doubt all that many folks are reading your missives every day, and therefore only get a smattering of your thoughts, but lose the continuity they present on a daily basis. I am looking forward to hearing your thoughts on my understanding.

Subsequently, the S&P 500 broke out above its January 15, 2014 all-time high. But it wasn't just the SPX that made new highs; the Nasdaq Composite (INDEXNASDAQ:.IXIC), the S&P MidCap (INDEXNYSEGIS:MID), and the Russell 2000 (INDEXRUSSELL:RUT) all set new bull market highs. Also making new bull market highs were just about all of the Advance/Decline Lines I monitor, including the Operating Companies Only A/D Line. In fact, one has to look pretty hard to find something wrong with last week's upside breakout above the no-man's-land between 1813 and 1851. Looking at the few negatives, one has to point to the Dow Jones Industrials (INDEXDJX:.DJI) and Dow Jones Transports (INDEXDJX:DJT), which still reside below their respective all-time highs. Of course, if that is corrected this week, it would be yet another Dow Theory "buy signal" like the dozen we have seen since the March 2009 lows. Also negative in the short term is the overbought condition of the equity markets and the fact that my internal energy indicators are out of energy. However, in bull markets, stocks can stay overbought for a very long period of time.

Nevertheless, given the equity markets' upside breakout in last Friday's morning article I included a list of stocks that screen positively on my proprietary algorithms, and are positively rated by our fundamental analysts. I wrote the following:

They also play to some of the themes discussed in these reports. To wit, LKQ Corporation (NASDAQ:LKQ) plays to our waste theme as the No.1 supplier of wholesale recycled OEM replacement parts for the auto industry. Last week LKQ "missed" its consensus earnings estimate and its shares were subsequently punished. Our analyst, Sam Darkatsh notes, "We reiterate our Outperform rating on LKQ after having missed its 4Q13 earnings estimate, and January remained soft (albeit still up y/y), due to weather (inability to ship). However, that same weather should provide a boost to demand (via repairs of cars in accidents) and supply at auctions (helping LKQ's gross margin and fill rates)." Similarly, names like Swift Transportation (NYSE:SWFT), Johnson & Johnson (NYSE:JNJ), The Fresh Market (NASDAQ:TFM), Weyerhaeuser (NYSE:WY), The Williams Companies (NYSE:WMB), United HealthGroup (NYSE:UNH), WCI Communities (NYSE:WCIC), Verizon (NYSE:VZ) which was unduly beaten up recently, and don't look now, but eBay (NASDAQ:EBAY) has broken out of a huge basing pattern in the charts -- all of these names make sense for under-invested participants."

The call for this week: My firm is in Orlando at the Raymond James 35th Annual Institutional Investors Conference where roughly 350 companies will be presenting to some 900 portfolio managers and analysts. As always, we will be attending many of the presentations and will be talking about some of the better ideas we glean from those meetings in these missives. While our attention will be focused on the conference this week, Wall Street's focus is likely going to center on the 24 economic reports slated for release. The Street will also put on rabbit ears for news out of Russia and the Crimean peninsula for various gleanings. The Ukraine's military is clearly not a match for Russia's, which has hemmed in Crimea. The West's limited options to punish Russia seem to be confined to no military options, leaving only economic options, which appear to have a de minimis impact on everything. Russia clearly holds the upper hand, leaving Putin with the upper hand! And that was playing in spades this morning with the S&P 500 preopening futures off more than 20 points, making our cautious approach to the markets seem appropriate. Overnight, China's PMI was reported better than expected (50.2 vs. 50.0e), while Europe's manufacturing PMIs also came in better than expected.
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