Time to Cash In?

06/06/2013 7:45 am EST

Focus: MARKETS

Anthony Mirhaydari

Columnist, MSN Money

There are signs in the market that it's time to take your chips off the table, says Anthony Mirhaydari of MSN Money.

Nancy Zambell: I'm speaking with Anthony Mirhaydari, who writes a very interesting economic column for MSN Money. I just read recently, Anthony, what you wrote about investor sentiment—how it's just so euphoric now, but the insiders are beginning to sell into this euphoria.

Anthony Mirhaydari: Yes, it's really quite fascinating. There are various ways you can measure investor sentiment. One, is you look at what newsletter writers are talking about. Their level of confidence is back to 2007, 2000 bull market...peak territory. You look at things like small speculators in the futures market. That's also quite extended.

And then you take the other side of that coin and say, what are the insiders—the professionals, the hedge-fund traders—what are they doing? And you can gauge their positioning by looking at things like hedging position in the futures market, options market activity, and/or the relationship between stocks and bonds.

If you compare those two—look at the dumb money versus the smart money—that spread is actually back to early-2012 levels, ahead of multi-month corrections. You might have seen a lot of euphoria out there, but data suggests, at least, that insiders have been selling into that euphoria and positioning for a weaker market.

Nancy Zambell: Do you think those insiders are expecting just a small correction—5% or 10%—or an all-out, drag-the-market-down to the bottom?

Anthony Mirhaydari: It's hard to say. If you just look at the sentiment gauges, we're back down to levels that we had in September 2012 and April 2012. T those weren't comfortable, but they weren't catastrophic.

What is kind of worrisome is that the sentiment gauges have really disconnected from what the market has done. The market's just gone vertical, and the sentiment gauges have kind of rolled over for the insiders. And it's been very extended.

Also, the market's really disconnected from the fundamentals more so than what we saw in 2012, which is the last time the sentiment measures reached these extremes. So we're definitely pretty far out of where we should be, based on the fundamentals.

The market's pretty far from where it should be, based on the sentiment gauges, so that suggests we could have quite a ways to fall before we kind of come back into normalized areas.

Nancy Zambell: That sort of goes along with what you were telling me earlier with commodities, that you're seeing some warning signals there.

Anthony Mirhaydari: Yes. If you look at the economic data, it's definitely rolling over, missing expectations more and more-both here and overseas. Then if you look at areas of the market, aside from stocks-because stocks are kind of in their own universe right now-ask what they are saying about the economy.

Copper is very weak. Crude oil is very weak. The precious metals market is suggesting we could have falling prices. So the bond market has been pricing in a little bit of deflation lately. All these other areas are suggesting there's definitely trouble on the horizon.

Nancy Zambell: Therefore, you see somewhat bullishness in gold and in silver today?

Anthony Mirhaydari: A little bit. Gold and silver have just been so technically wiped out that they're probably going to have to base here for a little while—maybe a few weeks.

It's really tough for conservative investors. There aren't a lot of really attractive defensive options right now—maybe nibbling away at Treasury bonds, possibly. Other than that, I really think taking profits, moving to cash, would probably be the best advice right now.

Nancy Zambell: So you would be 100% in cash right now?

Anthony Mirhaydari: It would depend on somebody's risk tolerance and their situation, obviously, but when the market's disconnecting so much from the fundamentals; when sentiment is so high; when the insiders are really kind of moving out the back door; when the entire commodities complex is flashing red; when the Treasury bond market is flashing red; cash is a position that serves a purpose at a certain time.

And I really couldn't think of a better time than now to just take the chips off the table and just hunker down, and kind of wait for the smoke to clear.

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