5 Reasons You Should Move to Cash

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Stocks continue their near-vertical trajectory out of the Oct. 15 lows. This is going down as one of the most powerful, most persistent and most eagerly joined market rebound in history. The last two that were similar were coming out of bear market lows. This time, the S&P 500 didn’t even hit the criteria for a correction, dropping less than 10% peak-to-trough.

move to cash

And we’ve seen investor sentiment swing so fast it’s a wonder people didn’t break their necks: Over the last two weeks, according to Investor’s Intelligence, bullish opinions among newsletter writers like me has increased the most in nearly 40 years.

But after bagging nice gains in late October, including a 73% rise in Caterpillar (CAT) calls and a 67% rise in Exxon Mobil (XOM) calls recommended to Edge Prosubscribers, I’ve recommended clients sell their positions and move to cash ahead of what I expect will be a stomach-churning reversal to the downside.

Here are five reasons why:

Breadth

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The primary concern is what the market itself is telling us. Not just price action, but in the number of stocks that are participating to the upside. You can see this in the chart to the right, which compares the percentage of New York Stock Exchange stocks above their 50-day moving average to the Dow Jones Industrial Average.

Right now, less than 60% of the NYSE stocks are in uptrends vs. 65% in September and 85% back in July.

And yet the Dow is well above both its July and September highs. This is a negative divergence that has, in the past, led the market weakness going forward.

Politics

politics
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Over the last few days, the market has been bolstered by hopes that the GOP takeover of the Senate — shown in the accompanying map — with what is likely to end up being a 54-seat majority is a positive since it increases the odds of pro-business legislation such as corporate tax reform.

But this ignores the political realities of the last four years: partisan rancor, gridlock and multiple market weakening fiscal showdowns.

President Obama’s post-election press conference Wednesday, as well as press conferences from Congressional Republicans, suggests little has changed. Obama is threatening executive action on immigration and doesn’t see the election result as a repudiation of his policies. Republicans are planning to push ahead with anti-Obamacare legislation.

Fiscal deadlines include the Dec. 11 expiration of the current continuing budget resolution and the debt ceiling being back in play in March.

Monetary Policy

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With all the excitement of the election, it’s easy for forget the big news that the Federal Reserve just ended its two-year-old “QE3” bond purchase stimulus program. No longer will the market benefit from the steady injection of cheap cash into the financial system. Over the last five years, QE3 and the iterations of the program that preceded it have boosted the monetary base in a massive way, as shown to right.

Whenever the money pumping stopped, as it did in 2010 and in late 2011 through late 2012, stocks underperformed.

Small Caps

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While the large-cap stocks in the Dow Jones Industrial Average and the S&P 500 have been leading the way higher, smaller stocks have been lagging behind. This isn’t a sign of strength; but is instead a sign of investor apprehension.

The chart to the right shows how the Russell 2000 Small Cap Index remains below its March, July and September highs as it’s been underperforming the Dow since the beginning of the year.

Shift Into Defensives

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And finally, after a brief pop in late October, cyclical stocks, such as those in the Consumer Discretionary SPDR (XLY), are once again underperforming defensive stocks in areas like utilities and consumers staples, such as those in the Consumer Staples SPDR (XLP).

The ratio of the XLY vs. the XLP, shown at right, is a proxy for how confident market insiders are about the health of the economy, the consumer and the stock market.

Declines in this measure in March/April and in September/October were associated with broad-market pullbacks.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.


Article printed from InvestorPlace Media, https://investorplace.com/2014/11/5-reasons-to-move-to-cash/.

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