Recently I got an email from a reader named Frederick with a simple, but important question.
You see, I recently warned my readers of imminent volatility in the markets. Those familiar with my work know I tend to lean bullish on markets in general – so any sort of bearish sentiment tends to bring about some questions. And Frederick wanted to know, in particular, how much of a portfolio I suggest allocating to cash ahead of this volatility.
So, in today’s essay, I’ll answer Frederick’s question about the upcoming volatility, show you why I’m convinced we’re just days away from this volatility, and what you should do to protect your profits…
This is for Jason at Palm Beach Trader. If the market is overbought, how much you think we should allocate to cash in our portfolio?
– Frederick H.
Frederick, thanks so much for writing in. Let me first say that our publishing policy prevents me from giving anyone personalized advice. So I’ll speak in general terms…
Next, let me provide some important background info on the imminent volatility before I respond to your question.
I use my proprietary Big Money Index to guide me when markets are overbought or oversold. It allows for pinpoint accuracy in calling extremes, like in March 2020 when I forecasted a market trough for Friday, March 20. It happened just one trading day later, on Monday, March 23.
When the BMI peaks, the market usually trends higher for a little while and then starts to fall. Recently, I issued a bold prediction that the BMI would peak on December 21. (It actually peaked on December 20 – again, off by only a day.)
My prediction went on to say the market would peak on January 18, at an S&P 500 level of 3828.50. Again, decades of data and fine-tuning of my system is what allows for such precision.
So Frederick, there’s no question the market is heavily overbought right now. But as we saw from April to September of last year, it can stay that way for a long time.
The key is to know when the big money is getting out while everyone else is still buying. That’s happening now, which leads me to the following prediction: The market will start to fall this month and ultimately trough in April.
It’s important to understand that this isn’t me turning bearish, or suddenly thinking the fundamentals of the stock market are not in line with future price gains.
It’s just that, like anything, when things go too far in one direction, they tend to inevitably snap back – like a rubber band. The same is true for when things get overly bearish and oversold, as we saw in March of last year.
We are in an extremely overbought period. There’s only so much more buying that can happen before things need a rest – which I think is near to happening.
Here is the full list of predictions I laid out back on December 20…
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The market went overbought on December 2
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The market will remain overbought until January 13, 2021
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The Big Money Index will peak on Monday, December 21, 2020, at an S&P 500 level of 3731.56
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The S&P 500 will peak on January 18, 2021, at a level of 3828.50
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The S&P 500 will then subsequently fall until Monday, April 19, when it will trough at 3341.81
These predictions will guide my own investing strategy in the coming months, which might be markedly different than yours.
And that brings me back to your question…
As with any investment decision, it all depends on your objective and strategy. I don’t know your strategy, but I can tell you mine: I don’t sell stocks.
I know it sounds crazy… but I spend all my professional time isolating the best of the best stocks out there: the 50 out of 5,000. The outliers. The needles in the haystack.
When you find those, they perform long-term like no others. So, personally, I don’t sell.
In Palm Beach Trader, I guide readers through profit-taking and loss-limiting moves so they can lock in tangible results from reading my research. That’s more active than my personal strategy.
So when an overbought market comes, I know I’m going to feel some short-term pain on my stocks. But my long-term game is HUGE growth. So when volatility comes, I ready my cash that’s been building up on the sidelines through savings.
When no one can take the pain anymore… and you start seeing money managers appear on CNBC calling for the end of the world – that’s usually when I pounce on beaten-up, high-quality stocks and tell my readers to do the same.
Short-term traders may want to raise cash right now and try to time market moves. But I play the long-term game, so I just make sure I have cash at the ready to own more of my winning positions when things seem too ugly to bear.
I honestly can’t tell you how much cash to have or how you should prep. I don’t know your portfolio. I do know mine, and I have faith in the stocks I own for the long haul. Just as an all-star athlete can slump for a few games – I expect my stocks to do the same from time to time. It’s part of my game.
As for cash – that’s part of my game too, but I just make sure I am always building it up to slap into stocks when the deals come raining down…
I hope that helps, Frederick. Thanks again for your question. Happy New Year!
Patience and process!
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Jason Bodner
Editor, Palm Beach Insider