The market is behaving similar to early 2001, when stocks were reeling from the unwinding of the tech and telecom bubbles, according to one investment strategist who raised the amount of cash in his firm's U.S. portfolio to levels not reached since 2000.
RBC Capital Markets Chief Institutional Strategist and Director of Capital Markets Research Myles Zyblock reduced exposure to stocks in the firm's U.S. portfolio 5 percentage points to 55 percent. Exposure to U.S. bonds stands at 20 percent and the rest — 25 percent — is in cash.
"This is the most cash we've had since 2000," he said in an interview. "I am preparing for the worst and hoping for the best."
Toronto-based Zyblock, who is not a technical strategist, said that two indicators caught his attention — the first one on May 19th when the Standard & Poor's 500 index failed to rise above its 200-day moving average.
"If you look at history ... it was a bit disconcerting. If a rally was going to fail that's where it was going to — and it did," Zyblock said. The second milestone was on Wednesday, when the index couldn't hold above its March closing low of 1273.37.
"The inability of the index to clear this first hurdle was eerily reminiscent of the what happened in early 2001, about one-third of the way through the last major bear market," he wrote in a note to investors.
From the end of January 2001 to the beginning of April of that year, the S&P 500 plunged 24 percent as investors sold off technology and telecommunications stocks. The underlying reasons this time are stress in financial markets and the pressure on consumers from high oil prices, Zyblock said. Prior to the early 2001 decline, the S&P 500 had peaked in March 2000. The index later fell further in the aftermath of the Sept. 11th terrorist attacks.
In addition to raising its cash position, Zyblock has returned financials to an "Underweight" rating after a short time at "Market Weight," meaning he thinks the firm should hold a lower percentage of financial shares than represented in the S&P 500. He had upgraded his weighting on financials to "Market Weight" at the end of January.
"We'll be watching for a significant break in oil prices or an easing in financial market stress as signals to purchase more risk for our portfolio," Zyblock said.