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| Stocks: Confusion and Strategy - Mar. 28, 2005 |
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Summary
My recent "Red Alert" missive caused some confusion. This brief update will hopefully clear it up, as well as put some near-term stock-market strategy thoughts on the table.
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Confusion
The "Stocks: 'Red Alert' Reaffirmed!" missive (dated 3/24), contained the following statement:
"I will also paraphrase a recommendation contained in the 2/21 piece: If you are holding substandard cash reserves to weather the continuation of the secular bear market, do something about it!"
"Substandard cash reserves" is what created some confusion. My intent here was simple enough, to wit: To convey the idea that if investors were not holding sufficiently large cash reserves to cushion the effects of what I believe will be the reassertion of a bear-market trend, they should go increase them.
However, what is "substandard" to one person may not have the same meaning to someone else. Some investors (most mutual funds, for instance) consider a 10% cash position to be large. In fact, many mutual funds, per their prospectuses, cannot hold more than 5% to 10% in cash. There is also a group of investors, albeit small these days, who insist on being fully invested all the time.
On the other hand, there are certain institutional investors -- some individuals, too -- willing to go all the way to a 100% cash position, if they believe market conditions warrant it.
Therefore, what constitutes major, above-average cash reserves (versus "substandard" ones) is very much a moving definitional target, depending on a number of considerations and variables.
One thing is for sure. If the stock market takes a significant tumble, the less you are exposed to it the better off you will be!
Strategy
At present, my model equity portfolio is holding about 90% cash reserves (T-Bills), and a 10% short position in the S&P 500, opened on 3/4 at 1220.38. As matters currently stand, I want to expand the short position, probably to the maximum permitted under the account's guidelines, which is 40% of account value.
The stock market presently is heavily short-term oversold, plus, we are coming up on quarter-end, that magical period when windows get dressed." It is my thought that the combination of these might give the market an on-balance lift over the next several trading days. In turn, I would use this strength to increase my S&P short.
I would not mind winding up with an average price on the entire position of, say, 1200 or higher, taking into account that about 25% of a full short position already is in place at 1220. Longer run, assuming I get the full short on the books, I might entertain covering it in the 1140-1150 area. This would result in adding the better part of 200 basis points of profit to the entire portfolio, an amount I believe would have justified the risk inherent in the transaction.
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