Cash is King

I think we are in an environment that strongly argues for having at least 20% in cash, or higher, depending on your years left until retirement.  

It seems that everyone has an aversion to being heavily in cash in their retirement portfolio.  You hear people say,  well I have to make some money somewhere.  Then, you usually look at what they are invested in, and see that it has done terribly.  I'll never understand why more people don't see the beauty in losing nothing, over losing 15, 30, even 50% in something that is highly aggressive.

The other argument is that if you have 15, 20, 30 years, then why try and time the market?

It's not about timing the market exactly, but noticing larger cyclical trends that you can capture the bulk of the move, but not trying to time the exact bottoms or tops.   There are obvious times when the environment is not conducive to strong returns.  I think now is an obvious time, and I'll lay that out more as time passes.

Major bottoms in any market are made when VERY few have the cash to buy it.  Great investors have cash available for opportunity.   Most everyone else is stuck in a losing trade, just hoping it comes back.

With all the landmines that are going off, and the many that are fast approaching, with the increased chance of a domino effect, why is everyone so complacent?  Check the volatility index, which measures complacency and fear.

http://stockcharts.com/h-sc/ui?s=$VIX&p=W&yr=3&mn=0&dy=0&id=p78854099798

Sorry, can't get the above link to work properly.  If it goes to the Dow, type in $VIX in the symbol area.

It's been bouncing near the bottom end of the range, showing massive complacency.  The spikes into the 40's are when there is massive amounts of fear.  Notice they do occur on some regular basis.  See what the markets did during those times.

I believe you will see a large wave of fear show up in the next 12-18 months.  There are many issues ahead. What political party will run the next several years?  Will they ever make the tough decisions?  The debt ceiling is fast approaching again, and will become a major topic.  So will the Bush tax cuts that expire at the end of this year.  The Federal Reserve is trying to float the market so that over a long period of time everyone can heal their massive wounds.  To do that, prudent managers have to take advantage of the up cycle.  The following chart is updated through June of 2012.  http://www.crestmontresearch.com/docs/Stock-This-Secular-Bear.pdf

That's a large rally, and one that needs a breather, in my opinion.

I am not trying to say for sure that the drop will start soon, but I do see the possibility of a move to 10,700-11,000 before the end of the year.  My long term target for getting aggressive in equities again is around 8800.  It may come in 2013, it may not come until 2015, but I believe it is very likely to occur.  When the Dow is back in the 10,000's, I think one can start looking for more opportunities.  You'll need some cash if you wish to take advantage of that opportunity.  Don't be the person that is merely moving money out of a bad place, to a better place, after the plunge.  


In the meantime, we need to search for alternative places to place our money.  Short the yen, short French bonds, corporate bonds(after a fall), managed futures are coming to mind.  Stay tuned for possible ideas in these areas.  

* I am not a registered financial advisor.  This blog is for entertainment purposes only.  Please consult your financial advisor before making any decision with your portfolio.