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Jeff Saut: Why You Should Not Be Fully Invested Right Now


From the Buzz & Banter: You will need cash to buy bargains when they appear.

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO.

A financial advisor writes:

Hey Jeff,

About a month ago, I emailed 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?

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 to the question was the following:

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 investment ideas to be precise). Further, I am never 100% invested. At most, I am 95% invested because I believe cash is actually an asset class.

Indeed, to assume the investment opportunity sets that are available to you today are as good, or better, than any that will present themselves next week, next month, or next quarter is naive, and you have to have cash to take advantage of those opportunity sets. Unfortunately, a month ago, I could not determine if this was going to be only the 5-to-7% correction that was due in the first three months of the year or if it was the beginning of the 10-12% correction that was due over the course of this year based on historic precedent. Regrettably, I still don't know if the pullback is over. And evidently, I am not the only one because someone read me Stan Weinstein's always insightful comments from his weekend report. While I scribed as fast as I could, I am sure my paraphrasing is not as good as Stan's actual verbiage. To wit: We feel that it is critical that you bring your "A" game to this battle. Nothing we have seen, as we have gone through 1,000s of charts, has caused us to alter that opinion. While the rally continues to chug along, it's everything we've told you to anticipate. It is selective, and despite the major averages edging higher, a lot of issues that we have been bearish on are totally ignoring this rally.

Yesterday, however, investors (and traders) threw caution to the wind and "bought" on the anticipation that new all-time highs were fait accompli, driving the Dow Jones Industrial Average (INDEXDJX:.DJI) up nearly 200 points by noon. Despite the Dow Delight, the senior index struggled into the closing bell to end the session 104 points higher with no new high. The S&P 500 (1847.61) fared even worse with the S&P trading above its previous intraday high (~1851), but it ended below its January 15 closing high of 1848.38 (see the chart below). To me, the early morning "spurt" looked very much like a short-covering affair due to the low volume, making today's session pretty important. But remember that the successful investors have to be able to ignore two out of every three money-making opportunities.
Click to enlarge
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No positions in stocks mentioned.
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