Are current cash allocations signaling the next market drop?

What Happened To The Wall Street Journal?

The Wall Street Journal is a paper of high integrity, right?

There is a certain expectation that their articles will be well vetted and of high value. If you read an article from The Wall Street Journal, one is expecting it’s worth your time.

The Wall Street Journal is the third most circulated newspaper in the US and has won 27 pulitzer prizes since USA Today started in 1982.

The second most circulated paper is The New York Times which has won 21 Pulitzer Prizes since USA Today has been in circulation.

And then the US has USA Today, the most circulated papers in the United States with, wait for it, one Pulitzer Prize since 1982.

If a reader wants real journalism…

…they either read The New York Times or The Wall Street Journal. And if it’s about investing then its The Wall Street Journal.

So I find it interesting that one of top newspapers of our generation has changed and has lowered their standard.

Let me explain.

Michael Wursthorn writes for the Wall Street Journal and wrote a piece on January 21st 2019 that talks about the amount of funds that are flowing into cash.

The exact article title is, “Investors’ Dash for Cash Adds to Stock Market’s Vulnerability”

The Wall Street Journal article highlights the incredible amount of money that flowed into cash in Q4 2018.

The article goes on to talk about the other times in the past 67 years that cash allocations were this high.

If you have a subscription to The Wall Street Journal then you can read the article right here.

Here’s the punch line.

The last time cash allocations where this high was Q1 2009. This was the exact quarter the US stock market finished it’s 58% fall.

And the other time cash allocations were this high was in Q3 1974, this was when the stock market market finished its worst drop in the 1970’s for a total fall of 48%.

Being compared with two of the three worst stock market falls since 1970 is not good.

Though there have only been three 50% drops +/- in the US Stock market since 1974, two had cash allocations similar to today.

This current stock market correction is in the sub 20% range still and has stabilized. So I find it interesting that the cash allocation is near the same percentage as two of the three worst falls in 67 years.

This tells me two things:

  1. Volatility will only increase with zero money printing by the Fed and ECB
  2. Investors got really scared with just a sub 20% fall.

Imagine what’s going to happen when the market really breaks down?

Investors are worried.

But that doesn’t mean you run to your cave and start eating your canned food (read: 100% cash).

Side Note:
Yes the US economy is in its 114 month of economic expansion, which is its second longest in US history (the longest was 120 months).

So if the US economy can make it to August 1st 2019 without a recession then the US will have matched it’s longest economic expansion in history. If it makes it to September 1st, it will be the longest economic expansion in US history.

And imagine it only took a zero percent interest rates policy from November 2008 until December 2015 (six years). AND $3.5 trillion printed by The Fed. And $7.6 trillion in deficit spending by the US Government.

Combine those last two numbers and the US Fed/Government has printed/created out of thin air $11.2 trillion dollars. Perhaps this is why gold is starting to wake up.

And now we’ve got The Wall Street Journal acting more USA Today than, well… The Wall Street Journal.

You see, I’m plus/minus on data like Michael used in his Wall Street Journal article as it feels sensational more than anything else because there just aren’t enough data points.

And journalists can ALWAYS find, “this only happened” type of data for anything.

Here’s where Michael lost credibility and why the subscribers of The Wall Street Journal should be concerned.

Michael quotes Jerry Freund.

Yes, that Jerry Freund. What are Jerry’s credentials? None. In the article Jerry is described as an investor from Orange County, New York. Now Jerry might be a great guy who takes care of his lawn, but who cares what Jerry thinks?

Who’s Jerry? And why is he being referenced by a Wall Street Journal staff writer?

The article goes to listen to Jerry talk about how he went to 100% cash in October 2019. And is not going to get back into the stock market until Transportation stocks rally. As that would suggest a healthy the US economy to him.

You can’t make this up.

The Wall Street Journal is getting information from Jerry.

I want to know Jerry’s track record.

Going 100% out of the stock market in one step is not behavior of someone that has gotten it right the past 20 or 30 years. Heck Jerry might only be 20 or 30 years old. We don’t know. We only know what county he lives in. Like that even matters.

Words that an investor has never uttered, “Hey did you hear what Jerry from Orange County New York said???”

Do people in Orange County New York even invest?

Heck, I didn’t even know there was an Orange County New York. I’m familiar with the one in California but New York?

I had to look up Orange County, New York because apparently The Wall Street Journal has identified Orange County as a County to follow.

What did I learn about Orange County?

It’s the home to West Point, Velveeta Cheese and the country’s oldest winery. Nothing about investing… or Jerry’s track record.

Let’s unpack Jerry’s 100% cash choice and his “not getting back in until Transports rally” comment.

First, the article pointed out that cash allocations this high was a sign of the end to a correction/crash and not the beginning. So is The Wall Street Journal making fun of Jerry? And if so, then why are they so interested in his opinion?

And second. Does the investing world even care about the Transportation sector anymore?

See the image below.

Today Transports represent that very thin blue line just below the top green section. That blue line is so thin today you might think its a separator color between Finance (top green) and Utilities (brown).

Stock allocation to market

Now, if were were talking about the 1840’s to 1920’s I think transports could be telling us a lot. But it’s not the late 19th century. It’s the 21st century.

And we got Jerry being quoted in The Wall Street Journal talking about how Transports are the go-no-go indicator to “getting back into the market.”

The presupposition is that Jerry knows what he’s doing. And that you might want to listen up.

Because The Wall Street Journal is quoting him. And this is the paper with more Pulitzer Prizes than any other publication since USA Today began circulation.  Jerry finishes by saying if Transports go higher that would suggest a healthy US.

Are you kidding me?

What Century is it?

Please look at that chart just above again. The thin blue line is what represents Transports out of the entire stock market. I’m not sure the world really cares about the transports today like it did in say, 1875.

Yes, they matter to some degree but is 2019. And what really matters is semiconductors, technology, communications, healthcare and finance.

Heck if you look at the weighting of the stocks that make up the S&P500, you don’t even get to a transportation stock until number 39 (Union Pacific Corporation). That means there are 38 stocks that have higher weightings (read more important to the US economy) than any transportation stock.

You want to know what the five biggest components of the S&P500 are today:

  1. Technology = Microsoft
  2. Technology = Apple
  3. Technology = Amazon (officially consumer discretionary)
  4. Finance = Berkshire Hathaway
  5. Technology = Facebook (officially communications)

And then you’d have to wait until you got to the 75th biggest weighting, which is UPS to find the next transportation stock.

And yes, I know about The Dow Theory from the early twentieth century. But please remember we are living more in the age of Star Trek and less in the age of Bonanza.

Transports will not be going away but I’m not sure The Wall Street Journal should be quoting Jerry.

“What did Jerry say this week?”
– Nobody, ever

So what’s an investor to do?


What are the price charts trying to say to you?

Listen to what the prices are trying to tell you. Because if you do, you know you shouldn’t be 100% in cash. And you know there is a tug-a-war going on right now with bonds/cash and the stock market.

And if you’d like to listen a little bit more, I recorded a video comparing the Transports to the S&P500 with dividends over the past 20 years.

You can start listening right here.

In Your Corner,

RCPeck-Dig Signature.JPG

RC Peck, CFP


What are the price charts trying to tell you? If you don’t listen you are bound to repeat the mistakes of the past. But if you listen then angst, fear and confusion falls away.  And what you are left with is clarity. There’s a better way. In a world defined by hype, overwhelm and confusion — I will work very hard to put clarity and a powerfully simple approach first. The next step is an easy and insightful conversation.

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