Cash at 15% to 20%

7/21/2008


Our recommended cash position depends on the market’s primary trend and the opportunities we see in individual stocks. While it has become difficult to argue that the market’s trend is up, the values available in the market appear more attractive than they have in years. Good values can become better values, and we would view a breakdown in the Dow Transports below the March low of 4,398.97 as a reason to raise our cash position. But, for now, we still see reasons to keep our cash position at 15% to 20%:

  • The Transports have not confirmed the bearish trend. With a close in the Transports below 4,398.97, both the Dow Industrials and Dow Transports would be trading below prior significant lows — and the validity of the April bull-market signal would be in question. Without new lows in the Transports, recent action represents divergence — a reason for caution but not a clear indication under the Dow Theory.

  • A near-term bounce would not be surprising. Based on the number of shares sold short and surveys of investors, investors have seldom been more bearish. Based on the percentage of NYSE stocks trading above 200-day moving averages, stocks have seldom been more oversold.

  • Much of the market’s weakness is concentrated in financials and consumer cyclicals, and our Quadrix® rating system is helping us steer clear of most of the worst losers.

  • High-quality growers are trading at attractive valuations. The average trailing price/earnings ratio of S&P 1500 stocks has dropped close to 18, a 13-year low. The average company’s earnings growth has held up well, partly because of continuing strength in energy and technology. These two sectors represent big portions of our Buy List and Long-Term Buy List. Going forward, the size of our cash position will hinge importantly on whether energy and tech can maintain their operating momentum — and whether other sectors can deliver improved growth.

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