Raise Some Cash

Economic and technical conditions have deteriorated. S&P advises a more defensive posture and suggests moving 5% from U.S. stocks to cash

By Joseph Lisanti

While stocks shrugged off the heightened terror alert for selected financial institutions, oil was a bit harder to ignore when it closed above $44 a barrel. And then came the July employment numbers.

The latest warnings did little to change the already heightened awareness of terror potential less than a half mile from ground zero. Since it reopened after 9/11, the New York Stock Exchange has been a fortress. Barricades halt traffic blocks away from the exchange building until bomb-sniffing dogs check out the vehicles.

But the climb in crude is an immediate worry to stock traders. Over the past month, the oil price has risen by about $5 a barrel. If oil were to stay there, it would be the equivalent of more than $36 billion in extra cost for U.S. businesses and consumers annually. That can put pressure on spending, something that may already be showing up in less-than-robust sales figures posted by those retailers whose clientele live from paycheck to paycheck.

The increase in oil prices coincided with a decrease in advancing stocks. In July, only 148 stocks in the S&P 500 rose in price, the fewest advancers in any month this year.

But the market really slid with the release of the July employment numbers, which showed only 32,000 jobs added during the month vs. expectations of 250,000. The S&P 500 broke through its previous support level of 1080, which had been holding for most of the year. Mark Arbeter, Standard & Poor's chief technical analyst, sees the next level of support for the index at around 1010.

We began turning more cautious on stocks in mid-June and have now lowered our recommended allocation to equities three times. Until the economy shows signs of renewed strength or the market bottoms firmly, we advise keeping only 40% of assets in domestic equities, 10% in foreign stocks, 10% in bonds, and 40% in cash.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE