If there is one thing that has worked since October, it’s cash. I feel like people are afraid of that word. Like you’re doing something wrong for raising some (or a lot of) cash. Do you think it makes sense to always be fully invested? I don’t.
I look at everything through the lens of potential opportunity cost. What else could we be doing with that money? In liquid markets, sometimes it’s treasury bonds, other times it’s gold, and of course all of the market neutral pair trades and options strategies to profit from sideways markets.
Cash is an investment too. Why do you always have to be all in? You want to think 50 years out? Go ahead. We’re only concerned about the next couple of quarters. We’ll worry about next year, next year. And 50 years from now? I only hope to be around sipping wine and ripping through charts. We’ll see…
So about today.
Here is the Dow Jones Industrial Average going back to the 90s. Whether you care about the horizontal lines or not, you can still agree that we’ve been in a sideways range for about 14 months. This comes after an epic rally from 2016 and through 2017. The consolidation is well deserved, and perfectly normal.
If you’re interested on how these lines are calculated, here is my explanation. Also, this is a video of a conversation we had about it last month. If you don’t care, that’s cool too. The point is, we’re in a sideways range and it’s coming at a logical level and classically after a substantial advance.
When you look at market breadth, most stocks in the U.S. and globally are still below their January 2018 lows. In fact, Internationally, only 6 of the 46 indexes we cover are above those highs. It’s just 2 if you price them in U.S. Dollars and not in local currency. It’s clear to me that stocks are still below overhead supply, as the chart of the Dow clearly shows as well.
When you go down the list of characteristics of a sideways range, a flat 200 day simple moving average is definitely on the list (see more here). Another one is when momentum keeps getting both oversold and overbought. It’s evidence that supply and demand are near an equilibrium. And what’s wrong with that? It’s always only temporary, but it does occur.
Here is the NYSE Composite showing these characteristics:
Here is the Russell3000 doing the same. Remember, this index represents approximately 98% of all investable assets in the U.S. equities market. From any sort of tactical perspective, it’s hard to argue that this is an uptrend or a downtrend. It’s a mess:
Again, I’d like to ask: What is wrong with cash? If there is one thing we’ve learned is that we don’t want to fight trends. The trend of cash working has been in place for almost two quarters.
What do you think? Should we be fully invested right now in U.S. stocks? Or is cash still king?