David BurrowsCASHCASHTOP PICKApr 14, 2025

The caller is a recent retiree who is considering increasing her cash position from 20% to 50% because of the possibility of recession and market drawdown. He feels that savings interest rates don't keep pace with inflation so your capital will be eroded. You can't predict recessions or the bottom of the market. Long term charts go up and to the right so get on that line. The average setback has been 11 months and happens every 4 to 5 years.. He has seen five bear markets in 40 years as well as some blips.

Generally, his firm tends not to hold cash. But when they see deteriorating breadth, it means that the ice is getting thinner under your feet on existing positions. So they raise a bit of cash, maybe 5-7%.

All their positions have stop losses. So in the last 3-4 weeks, they've been stopped out of a lot of positions. Which means their cash position has risen. As long as breadth is narrowing, they don't put on new positions. What looks good today could be what gets hit tomorrow.

Their cash position right now is about 22%. Cash gives you optionality, you don't have to put it to work right away. Buying into a falling market is not a great idea. When things start to get better, it gives you the chance to ask some questions. What's held up well relative to the market? What's fundamentally sound?

Gives you some $$ to put to work when the time comes.

(Note the short timeframe.)  April was a very sloppy market, and breadth was starting to contract (not enough $$ coming into the market). Obviously, markets have gotten a lot better since then. He's sitting at about 5% cash right now, pretty fully invested. Most of that cash rotated into international and materials.

Markets change, and they have to be ready to change for portfolios.

When breadth starts to weaken, his team stops putting money to work. No bear market in history took place while breadth was expanding. But most weak markets start with breadth deteriorating, with fewer and fewer stocks behaving constructively.

So they raised about 7-8% cash. If they get stopped out of a position, that cash goes to the sidelines. Remember that cash is a terrible thing to hold for any length of time, especially when governments around the world are printing money. But it does give you opportunity when you get into a sloppy market.

When you go through a correction, the market's like a great sorting hat. The weak companies get hit. The strongest companies are probably doing something right if people don't want to let those go. It's like the wind blowing all the sand away and leaving the boulders exposed.

At some point we'll start to see breadth improve. Who knows when that'll be? Once it does, cash gives you the chance to put some money to work.

As well, if the market gets worse then they have less exposure.

You can have all the opinions you want, but his firm uses quantitative measurements. He posts the "Bear-o-meter" on his blog every month (takes into account trend, breadth, momentum, sentiment, valuations, and seasonality and delivers a reading of risk as low, medium, or high). It's been very accurate in the past (he's been tracking it for almost 20 years). Not a market-timing tool, but a risk-parameter reading. 

Risk has been higher this summer. For example, there's more risk crossing the 401 in Toronto than crossing your neighbourhood street. You could still cross the 401 safely, or get hit by a car in your neighbourhood, but it's all about the risk you're taking.

The Bear-o-meter is measuring just 1 point above full-on high risk. Not quite at run-for-the-hills. He'll probably be coming out of cash in the next couple of weeks, especially with the China-US meetings. Things will probably be resolved, and then his firm will be fully invested.

Generally, he's been hovering around 25% cash, and that's a lot for him.

(Note the short timeframe.)  Summers are historically slow; particularly August, September, and October. People get seasonality wrong; it's just a tendency. Say you drive on the 401 in Toronto at 4 pm, the tendency is a big pile of traffic. At 4 am, the tendency is for way less traffic. But it doesn't mean there won't be a pileup at 4 am, or smooth sailing at 4 pm.

Over those months, the VIX tends to be a bit higher. Though it hasn't been this August. But doesn't mean it won't be in the next couple of months. So he likes to be a bit more defensive at this time, buying more defensive stocks and holding a bit of cash.

Ahead of the July 9 deadline for EU tariffs, be defensive and hold cash.

This is actually an ETF in Toronto, which buys HISAs. T-bills can fluctuate, but CASH is steady. Can buy and sell this.

(Note the short timeframe.)  We have a yin and yang market. He just published a video yesterday on this, with 4 technical reasons why the market is bullish, and 4 fundamental reasons why it's bearish. His conclusion is that we'll probably get a pullback in the near term, and then it all depends on what the orange man says next ;)

He's holding some cash because markets rarely make V bottoms. A pullback to the 200-day moving average or so is likely. And then maybe the market will go up. But he can't make that call today.

(The total return depends on how and where an investor held the cash.)

He has too much cash in his portfolio as a consequence of some dispositions. Normally, he tries to run 10-12% in his portfolio, and he's much higher than that right now. This has happened over the last year or so. He's been unable to deploy all his cash in suitably attractive opportunities. He's comforted in the fact that Warren Buffett's in a similar situation.

Cash gives you the tools and sometimes the courage to take advantage of difficult market conditions.

He's now at 20% cash. The S&P just broke below its 200-day MA. He doesn't have opinions about these things, just lots of rules. One rule is to give a breakdown between 3 days and 3 weeks grace.

Next week, if the S&P is still below its 200-day, he's going to raise another 5% cash for a total of 25%. He'll just have to keep an eye on what's happening. He gives it at least a 50% chance that we're falling into a bear market and, if we do, he'll move his bare cash into something that at least pays some interest. Lots of ways to park cash.

If he thinks it's just a pullback within a bigger uptrend, he wants his cash ready to deploy into opportunities. He wants it readily available, with nothing in his way. But if he becomes even more convinced of a bear market (POSSIBLY something like 2022 with a 25% drawdown), he wants cash in a vehicle such as a HISA, as he knows it'll be there for 3-4 months as the market continues to wash out.

The markets in Toronto and especially New York have done very well the past two years. It's time to pause. Typically, markets will go sideways or fall. It's likely we'll see more volatility like in December. Higher interest rates will hurt growth stocks, particularly tech, and overall markets. He's cautious near term.

CPI missed expectations today, so maybe the market now things cutting 25 basis points from interest rates isn't so bad. We need to wait for Q3 earnings starting in October before knowing whether the bottom is in. He doesn't know yet. It's wise to still hold some cash and to stay in the megacaps.

Have cash handy, because there's more room for markets to fall though markets tanked today. The panic could come back. He's holding onto cash and is ready to buy, but buy in portions, not all at once. Be ready for more fear.