By now you’re likely a bit full from all that yummy Turkey Day stuff, and hopefully enjoying the “food coma” that follows.

Perhaps your appetite for market talk is equally sated, so today I’ll keep it short and address a question many of you have been asking, namely:

What cash allocation is our Storm Tracker currently recommending?

Here’s a read on the Storm Tracker, and the answer…

Market Conditions Have Changed with Stimulus

The short answer is 36%. That’s down almost ten percentage points from our more bearish outlook this summer.

Another short answer: The Fed’s money printer is working overtime (again).

Since mid-October, we’ve turned noticeably (and provisionally) a bit more “risk-on” thanks almost entirely to the recent influx in billions of fiat dollar creation. Simply put: W here the money printers go, the markets follow…

Or stated even more simply: Don’t fight the Fed, however crazy and desperate they’ ve otherwise become.

Toward that end, our Strom Tracker has been running consistently in the mid-30’s for the last month or so, as the Fed has turned on the spigot. That has raised stocks and pumped the yield curve back up to “normal slope” mode.

That is, by purchasing T-Bills, the Fed has reduced the rates on the short end of the curve, causing it to steepen rather than invert.

That “stimulus” has also opened the jaws of our Déjà vu Indicator, as stocks rose faster than our spread between the S&P 500 Index and bond yields. Such market-rising impacts have been cumulative across the nearly 100 leading indicators we track for you week-to-week.

Combined, these are all confirmatory signs of a melt-up, one we called weeks ago.

In plain English, a mid-30’s risk reading (and hence cash allocation) is not as severe as the mid-to-upper-40’s percentages we saw as recently as September, but take heed: Storm Tracker risk percentages are receding for the wrong reason-i.e. stimulus rather than economic growth.

One look at our anemic GDP is proof enough.

The broader risks are thus front and center, and thus a healthy cash position is still in order.

Beware of Complacency Bias

As our recent article on bond risks and complacency bias made clear, we are not without strong concerns.

That is, the recent yield-curve “normalization” (i.e. steepening ) may seem good on the surface, but a rapid steepening of the curve after months of inversion is in fact an historically bearish, rather than bullish, indicator.

Such risks compel us to keep a forever-vigilant eye on risk management rather than mere top-chasing or blind faith in a now officially Fed-driven market high.

Folks, melt-ups are fun, but complacency bias created by Fed steroids are typical precursors to historic “Uh-Oh Moments.” A gain, all part of that dangerous cycle we’ve spelled out before; it’s a cycle investors need to be familiar with.

That’s also why we continue to press for healthy cash allocations – risk management – even as markets melt toward new highs.

There’s No Historical Map for This

It’s worth repeating that we are all in entirely uncharted waters now.

Never have U.S., and indeed global central banks, been this “accommodative.”

There is simply no precedent to follow and hence no certainty, other than tarot cards, for precisely timing the brutal expiration date of the historically crazy experiment now playing out at the Eccles Building.

For many of you who do not actively trade or manage your portfolios actively with daily risk tools, the safest bet is to think risk first, reward second. Hence the cash recommendation.

One of our readers, Giuseppe S., recently cited the many books read over the years that recommend waiting out storms, as they can’t be timed. This is modern portfolio theory in a nutshell.

In many ways, we used to respect this view.

But when markets rise this high on historically unprecedented and artificial (rather than natural) tailwinds, the uncertainty and risk of severe losses grossly outweigh the reward of patiently riding the markets peaks and troughs with an “all-in” allocation, no matter how diversified.

Stated otherwise, rather than wait out the storms, we prefer to simply avoid them altogether, and our Storm Tracker and Heat Map tools are just two of the many ways we try to stay ahead of this great (and ultimately risky) Fed Experiment.

Those with reasonable cash allocations today will have more dry powder to employ when markets bottom, and that folks, is where and when the greatest fortunes are made-not at risky, nosebleed tops currently in the headlines.

In short, thanks to Fed over-experimentation and over-stimulus, we maintain that such traditional thinking will get you slaughtered – worse than a barn of Thanksgiving day turkeys.

The bottom line: A reasonable cash buffer like we’ve outlined above is now critical.

Sincerely,

 

 

 

Matt Piepenburg


Comments

3 responses to “Here’s Our Recommended Cash Allocation for This Nervous Melt-Up”

  1. Dear Sir,
    I am reading every E-Mail from you and found them of great interest.I wonder if we can subscribe to a newsletter where you you give more specific information such as which stocks,ETF ,to buy or to short.
    Awaiting news from you,I remain
    Sincerely yours
    Hugo Kowalewski-Ferreira

  2. I tend to agree with a healthy cash savings in your portfolio (25%), but how about 20% of bullion silver like maple leafs or silver eagles bought at slightly over spot in your portfolio also ? Does this make sense if you have the option to do this ?

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