Should Investors Move Out of Stocks into Cash?

Investors took note this week as the S&P 500 broke through its 200-day moving average, a key resistance level, and S&P reiterated its position that the current correction could reach 15 percent.


So how low can things go? A pair of well-known investment newsletter authors, as well as a prominent economist and several hedge managers, are all sounding alarms.

Richard Russell of the Dow Theory newsletter advised investors to “batten down the hatches”, sell everything they can and get liquid.

And Dan Sullivan, noted technician and author of The Chartist newsletter told his followers to put 100 percent into cash. Here's is Sullivan's message to investors, dated May 18:

"We now advise subscribers who are acting in sync with our Actual Cash Account or Dan's Aggressive Account to sell all stocks moving into a 100% cash position."

"Traders are advised to hold current positions strictly adhering to the assigned mental stops. Traders note that the following stocks closed below their mental stops today and should now be sold: Abercrombie & Fitch, Alpha Natural Resources , Cliffs Natural Resources, J.C. Penney and U.S. Steel.

The last time Sullivan was 100 percent in cash was June 23, 2009; about a month later, he went all-in [equities] again, on July 21 2009. If you followed that advice, you would have missed about a 6 percent rally on the S&P 500 (close June 23 to open on July 21).

But, some of Sullivan's long-term followers may remember the approximately 40 percent they didn't lose when The Chartist recommended getting out of the market in January, 2008; he didn’t return to stocks again until April, 2009, just after the market hit bottom.

A writer from another financial website has also noted this bearish pair's advice.

As for the rest of the market? According to a report by Investors Intelligence, there are fewer market bulls today than there were a week ago. 43.8 percent of investment newsletters are now bullish versus 47.2 percent about a week ago. But, as one market watcher noted, these numbers are often seen as contrarian indicators.

And newsletter writers are not alone in their sentiment. At the SkyBridge Alternatives Conference (SALT) hedge fund event in Las Vegas this week, "de-risking" was a common theme.

Noted economist Nouriel Roubini told CNBC he believes the market will drop as much as 20 percent and thinks investors should also move to cash.

Michael Novogratz, President of Fortress Investment Group and James Dinan, CEO of York Capital used the word “nervous” to describe the current investment environment. But distressed debt investor Marc Lasry, Avenue Capital sees current dislocations as an opportunity, and he is “trying to take advantage of what’s going on” in the global economy.

Will the big bank strategists start to adjust their end of year outlooks next? Stay tuned.