Optimism Abounds as Cash Levels Plummet: Fund Managers Dive into Stocks Amid Sky-High Valuations

This year is set to be one of the most optimistic since the American Association of Individual Investors survey began in 1987.

Jason Goepfert, founder of SentimenTrader, which focuses on market sentiment research, highlights this trend.

On the positive side, such bullish sentiment can drive the S&P 500 to its second consecutive year of over 20% returns, paving the way for a strong start in 2025.

However, Goepfert warns that heightened optimism can often signal disappointing returns in the future.

As Goepfert states:

Stocks are currently valued at some of the highest levels in history by almost any measurement. [Historical data shows] a significant amount of capital is disregarding, and even chasing, market momentum.

Indicating just how optimistic investors have been this year, one of the most widely recognized surveys has shown only two weeks where bearish sentiment exceeded bullish.

While that is concerning, let’s dig deeper.

Fund Managers’ Cash Levels Hit Record Low in 2023

A recent survey of global fund managers revealed that cash allocations are at their lowest since at least 2001.

According to CNBC:

The average cash allocation among participants in Bank of America’s Global Fund Manager Survey fell to a 14% underweight, reflecting the largest underweight position in currency compared to stocks since the survey began.

Michael Hartnett, an investment strategist, described the data as “super-bullish sentiment” in a note to clients.

He attributed this surge into stocks to expected interest rate cuts from a “compliant” Federal Reserve and anticipated economic growth under President-elect Donald Trump.

To provide context, the recent 14% underweight marks a dramatic shift from November’s 4% overweight position. This 18-point drop is the largest monthly decline in about five years.

Stock Purchases Continue Despite Overvaluations

This trend can be seen across many stocks. Here are a few examples along with their current price-to-earnings (PE) ratios:

• CyberArk (CYBR): 1,139
• Gilead Sciences (GILD): 1,008
• CrowdStrike: 689
• Palantir: 376
• Datadog: 278
• Cava: 253
• Broadcom: 192

Let’s focus on Palantir (PLTR), a leading data mining and analytics company.

It is a strong business, but the question remains: is it a smart investment at its current price?

While we just discussed its PE ratio, let’s consider another perspective.

To give some historical perspective, let’s remember the Dot Com bubble.

Investors may recall Sun Microsystems, a tech stock that generated enormous wealth for investors during the late 1990s.

From 1996 until its peak in 2000, the stock price soared from approximately $5 to $64, a gain exceeding 1,000%.

However, when the bubble burst, Sun Microsystems’ stock price plummeted.

By 2006, its shares had returned to the original $5, erasing all prior gains.

Below is a visual representation of that dramatic decline:

In 2002, Scott McNealy, the CEO of Sun Microsystems, reflected on the extreme price surge and marked it as a cautionary tale for investors who bought near the peak:

Two years ago, we were selling at 10 times revenues when we were at $64.

At that valuation, to deliver a 10-year payback, I would need to provide 100% of revenues in dividends over the next decade.

This reckoning assumes no production costs, no operational expenses, and zero taxes — a far-fetched scenario for any company, especially one with a workforce of over 39,000.

Would you be willing to buy my stock at $64 based on these unrealistic assumptions?

What were you thinking?

Well,
“`

Understanding the Current Market Dynamics: Should You Stay or Go?

Investors have been caught up in the fervor surrounding internet stocks and their soaring values. Many are eager to strike it rich, prompted by the internet’s transformative potential. However, this enthusiasm raises an important question regarding the current valuation of Palantir.

How Does Palantir’s Valuation Stack Up?

With the context established, how expensive is Palantir today? Using the yardstick of revenues from the past, is it valued at 10 times like it was during the Sun Microsystems days? Perhaps 15 or even 20 times? Surprisingly, it’s now at a staggering 65 times sales.

This situation brings to mind a quote from mid-20th century publisher and writer William Feather: “One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.”

Is It Time to Exit the Market?

Our immediate reaction is not to advise an exit from the market. Stock prices and valuations are indeed important, but the bullish momentum driven by excited investors means that “eventually” could be a long way off.

Two pertinent quotes come to mind: John Maynard Keynes wisely noted, “Markets can remain irrational longer than you can remain solvent,” while investor Peter Lynch pointed out, “Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.”

Despite the optimism, having a plan to safeguard your wealth against a possible market downturn is crucial.

Navigating Risk: Strategies for Investors

To balance the risks associated with a market collapse and the prospect of significant gains in 2025, we suggest categorizing your portfolio into two groups: low-conviction and high-conviction holdings.

High-conviction stocks are those you view as foundational to your portfolio for many years. You accept that their value may dip in a bear market and are prepared to ride it out without anxiety, even if they drop significantly—say, 55%.

In contrast, low-conviction stocks do not meet this criteria. Once you’ve sorted your stocks this way, remove your high-conviction stocks from your monitoring apps. Ignoring their daily price fluctuations will help prevent emotional decisions during downturns.

When it comes to low-conviction stocks, it’s essential to adopt a more active strategy. Focus on trading the strongest stocks and employ a stop-loss system to minimize risk.

Luke Lango recently introduced a new trading system called Auspex. This tool identifies stocks that meet superior fundamental, technical, and sentiment criteria, scanning over 10,000 stocks to find those with strong operational backing. The recommended holding period is only one month unless a stock appears on the list again.

For effective risk management, consider engaging with TradeSmith, a leading quantitative firm that offers a trailing stop system tailored to the specific volatility of stocks and ETFs. Understanding whether a pullback is typical or a sign to exit is crucial for maintaining your investments.

Seizing Opportunities: The Rise of AI

Turning to market trends, artificial intelligence (AI) is set to become a major factor in robust earnings for 2025. According to macro expert Eric Fry, we are entering a new phase in the AI revolution, transitioning from AI “enablers” to “appliers.” These are the companies that successfully integrate AI technology into their products and services.

From beauty giant Coty Inc. (COTY) to resource explorer Ivanhoe Electric Inc. (IE) and industrial provider Rockwell Automation Inc. (ROK), AI appliers are emerging in diverse sectors.

This rapid expansion highlights the need for investors to identify top AI companies for the near future. To this end, Eric, Louis Navellier, and Luke Lango have produced a video detailing their findings, which can provide valuable insights.

Reflections on the Market’s Current State

As of Thursday morning, the market is attempting to recover from a recent downturn following the Federal Open Market Committee’s meeting. Whether this rebound gains momentum or falls flat, the resurgence of investor enthusiasm seems imminent.

It’s critical not to overlook this potential opportunity. As Luke remarked in our recent conversation, “Just like in a movie where the last 30 minutes are always the best, the last part of a bull market is also always the best.”

However, with time spent in the current market, solidifying a risk mitigation plan must be prioritized. If you haven’t already, take the time to define yours today.

Wishing you a productive evening,

Jeff Remsburg

5 Stocks Our Experts Predict Could Double In the Next Year

By submitting your email, you'll also get a free pivot & flow membership. A free daily market overview. You can unsubscribe at any time.