Cash is King, not dead money!
Holding mostly cash really is the best 'investment' since you can grab opportunities when they come along.
Dead money is a term used to refer to cash that isn’t earning interest or investments that aren’t growing or producing dividends, but that’s like saying a lottery ticket is just a piece of paper. Cash is king is a slang term reflecting the belief that money (cash) is more valuable than any other form of investment tools, such as stocks or bonds.
So which is it? Actually, both can be true. If you just let your money sit in the bank earning interest, then it is definitely “dead money”. It’s like leaving a vehicle sit outside for a couple of years without driving it. What may have been a perfectly good vehicle is now a wreck with a flat battery, rusted brakes, etc. It lost value. With inflation, money loses value. If you keep driving the vehicle and take care of it, it remains valuable. If you put your cash to work, it’s valuable.
Interest of a few percent or dividends of even 10% are actually pretty insignificant, like money on life support. It will maintain its value, grow a little, but it’s no lottery ticket. Cash, ready to buy something that’s suddenly available at a ridiculously low price, really is king.
I was living in Indonesia when the Asian economic crisis hit in 1997. Shortly before it hit, I was looking at a neighbour’s house that was for sale, in the center of Jakarta for about $300k. It was a reasonable price for a reasonably large house in the center of a major city and I could easily rent rooms to earn a good income while it appreciated in value. Suddenly the crisis hit, the rupiah crashed and I could buy the same house for less than $50k! Better yet, I gave the lady a $500 deposit (in rupiah) while I tried to come up with the cash. If the rupiah suddenly recovered, we’d cancel the house deal, change rupiah back to dollars and still double or triple our money. If the rupiah dropped further, the house would get cheaper as we exchanged dollars for rupiah. It was a perfect, no lose opportunity.
Unfortunately, I had recently agreed to take over a restaurant property so I didn’t have any cash. Friends and family had all their money tied up in RRSPs, etc. No cash, no deal. I tried for over a year to get the cash, with my $500 deposit that was refundable! I paid a bit more over that time to keep her happy and eventually they sold it to someone else and returned my money. A lost opportunity. I also heard of a guy who sold his vehicle in a bar to whoever had the most cash and then left the country.
Cash allows you to take advantage of opportunities and last week’s CPI report gave a crazy opportunity to bag 30% on the day, and 10% or better the next day in the other direction. You also knew in advance to be ready for it. It’s like buying a rigged lottery ticket that you know is a winner.
SOXL is the 3x leveraged bullish semiconductor ETF which follows SOXX, which is down 48.5% from its high to start the year. The largest 2 holdings are Broadcom (7.93%) and Nvidia (7.45%). It also has Intel (6.62%) and AMD (6.00%). Now, these companies aren’t going anywhere. This isn’t the dotcom bust when the technology was new and there were no established leaders. We’re also not going to stop needing the technology. We’re going to continually need more, so eventually these stocks will hit bottom and start a long climb back up. When is the big question.
I don’t have a crystal ball for when to buy, nobody does, and while many recommend buying now and buying more as the price falls, why do that? It could easily fall another 20-40% or more. On a few days, the price of the house in Jakarta was a mere $20k! Buying SOXL yesterday as it moved up from the early low of 6.22 in the first 10 minutes from opening -12.4% at 6.43 was an ‘easy’ bet. ‘Easy’ because you’ve been expecting a big gap lower open and hard reversal. ‘Difficult’ because it’s not easy to pull the trigger with a large position, unless you’ve already had a lot of practice and success. Goal scorers believe in themselves and want the puck/ball when the game is on the line.
When it was down from the high after 11:30, a mere 2 hours from buying, then it was time to take the 30% win as it was clearly “too far too fast” again. The next day, when it opened higher, and keeping the “too far too fast” idea clearly in mind, it was an ‘easy’ bet to buy SOXS, the short ETF and bag an ‘easy’ 16% on the day.
Of course, if you’re like me, lady luck may not shine on you. I have a cousin who is incredibly lucky and has won many lucky draws and such. It’s really remarkable because his brother and others never win and they have the same odds. On Thursday, ready for a continued market crash, like recent CPI and Fed days, and ready for a reversal, the charts on investing.com weren’t working. Flying blind kept me cautious, but I should have simply focused on a single trade, either SOXL or LABU, bet big and watched it closely using a different chart, like Google charts which I use to get the pre-market prices. On Friday, the same thing, the charts weren’t working and I was looking long having missed my chance the day before. Nothing is easy.
I’m also not a goal scorer. I tend to pass the puck/ball and generally played defence. I enjoyed playing offense but was better suited to defence. As with anything in life, practice makes perfect, so simply start practicing.
Buying SOXX at $298 a share is likely intimidating for small investors trying something new. Under $10 per share and free trading on your phone makes it possible for everyone to ‘take a shot’. Once you gain confidence and know you can score consistently, then having cash at the ready is a no brainer. You’ve then switched from being a farmer to being a hunter. Farming locks in massive amounts of cash and leaves you at complete risk to weather and global price swings. Likewise with typical investment strategies.
It’s interesting to note that SOXX is nearly fully invested with just 0.13% cash, and the stocks it holds have been falling all year! That’s just crazy, but that’s the mandate of the ETF and there’s absolutely no reason for you, as an individual, to hold. I presume large outflows would require them to sell shares regardless of price. SOXL on the other hand is currently holding 33.6% cash. Interesting.
The markets are once again ready to move north, south or east. Perhaps you missed all the recent opportunities, but you know what’s possible and you know how to do it. You simply have to take the shot and then be ready go on defence if their goalie makes the save. Buy on the early move and put in a stop sell right away. Once it moves your way, move your stop up a bit, but keep it loose, set an alert and carry on with your day, checking in periodically.
It’s also important not to wear yourself out, trying too hard and too often. Be patient. Wait for the next opportunity to come along. Often you’ll know days in advance when to watch closely and be ready.
Clearly, the CPI and Fed announcement days are ones to watch. Avi Gilburt says they don’t move the markets, but they certainly act as triggers. He is expecting the markets to rally and wrote this today regarding Thursday’s crazy price action, “In fact, before the market opened on Thursday morning, and as it was hovering near the recent lows, I sent out an alert to our members at 8:56AM, noting my expectations for a bottom being struck and noting that “[t]his should now be the selling climax that completes the downside structure.” The market bottomed within half hour of my alert.”
Louis Navellier’s email today says, “Cash holders are in grave danger”. “If you’re holding cash right now, you may feel like you’re bypassing all of the financial chaos… But, in actuality, you’ve become the primary target. You’ve fallen prey to the richest individuals in the world… the top 1%.” It’s typical click bait that I ignore, but it the title caught my eye.
Luke Lango’s email today says, “Want Proof the Bear Market Is Over? Check Out This Chart”, “I know. One day doesn’t make a trend. But Thursday was no ordinary day. The S&P 500 opened down 2% and finished the day up 3%. That’s a 5-percentage-point swing in a few hours. Stocks don’t normally do that. In fact, intraday reversals of that size in the midst of a bear market are very rare. And, indeed, they almost always tend to mark the end of bear markets.”
Apparently, a 5% bullish intraday swing in a bear market has only happened 20 times over the past 50 years. “Of those 20 occurrences, most happened in late 2008/early 2009 and late 2002/early 2003. One happened in March 2020, another in December 2018. One happened right after Black Friday in 1987. What’s the similarity? All those periods were either at or very close to stock market bottoms.”
What I see from that info, is that market characteristics have indeed changed. Moves are more extreme and chaotic that they used to be. Also, most happened in late 2008/early 2009 so we should expect more downside and more big reversals, and we shouldn’t expect a major reversal now.
Since the first big move in Sep. 2008, the markets dropped a LOT more before finding bottom in March 2009 and making the 11th 4.5%+ bullish intraday reversal. It’s incredibly annoying to have all the stock advisors making outlandish claims to try and get people to pay for their services.
Looking back to 2002-3, there were five 4.5%+ bullish intraday reversals before the market truly bottomed and began climbing. Now that’s actually useful information! My conclusion is that we should expect more downside and many more such reversals before the market perhaps bottoms in March next year.
So, continue buying the dips and selling the rips of short ETFs like PSQ. Trade the long side as well but keep your bias short. Also, be ready for more crazy 4.5%+ bullish intraday reversals and then look short. The simple “too far too fast” condition has also proven itself useful since June, so continue to keep that in mind. And of course, remember that “cash is king” and continue getting more ready and practice taking shots at opportunities as the come along.