“Extreme optimism has consequences. The last time we saw extreme optimism was late 2021, and that's when the broad market topped out and the blue-chip index temporarily topped out,” he noted.

Right now, Prechter believes that the behaviour of mutual fund managers is indicative of a period of extreme optimism.

“Two percent cash in mutual funds,” he emphasized, referring to the proportion of mutual funds’ total assets that are held in cash. “Now that is extremely low. It used to be when you got to 4% it was a bearish signal, and now we’re at half that.”

According to Prechter, such a minimal cash reserve is perilous. It suggests that mutual fund managers “can’t imagine” a market downturn that would offer a more favourable buying opportunity, prompting them to stay fully invested.

Investors might want to pay attention to Prechter's insights. After all, the founder of forecasting firm Elliott Wave International is famous for predicting the 1987 stock market crash.

‘Thinnest market’ on the upside: Why long-term stock holds are not your best bet

While the major stock market indices paint a rosy picture, Prechter warns of the subtleties obscured by these headline numbers.

He points out that the market’s gains are heavily skewed, driven predominantly by a handful of prominent names.

“The NASDAQ 100 is at a new all-time high, but the NASDAQ Composite is not. So even within the tech sector — which everybody loves — the leadership is extremely narrow,” he explained.

Turning his attention to the Russell 2000 Index, a broader market index comprising 2,000 small-cap companies, Prechter noted, “It's still down 20% from its high in 2021.”

He described the current market as the “thinnest” he has witnessed on the upside. While acknowledging that it could climb higher in the short term, he firmly stated, “I'm frankly just not interested in being long stocks right now.”

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Earning a return with ‘no risk’ while ‘doing nothing’: The power of high-interest savings accounts

Prechter's assessment of the current market climate is unequivocal — he advocates for safety.

He underscored this stance by pointing to the bond market, particularly the narrow yield spread between junk bonds and 90-day Treasury bills (T-bills), as a sign of unwarranted optimism.

“Junk bonds, yielding only 2% more than 90 day treasury bills, which is another indication of a ridiculous optimism. I'd say you're in a situation where safety should be paramount,” he advised.

So, where should investors look?

According to Prechter, “You can get [higher returns] for doing nothing and no risk. And there's so much risk in the stock market right now.”

Prechter may have been alluding to high-yield savings accounts or safe fixed-income investment products, such as bonds or guaranteed investment certificates. Right now, high-interest savings accounts (HISA) can offer as much as 5% in interest earnings (when you factor in promotional offers), and GIC rates slid past 5% in 2024. These products enable investors to stash their cash, earn interest and still keep their principal savings safe.

In addition to savings accounts, investors nowadays also have the opportunity to earn substantial returns through money market accounts. These are deposit accounts that offer interest rates influenced by the prevailing rates in the money markets. Investors can buy shares in money market accounts through an online brokerage.

Still, Prechter hasn’t entirely written off stocks — the market veteran is just waiting for the dip. “I think we're going to have a great buying opportunity whenever the market decides to give us one,” he suggested.

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Jing Pan Investment Reporter

Jing is an investment reporter for Money.ca. Prior to joining the team, Jing was a research analyst and editor at one of the leading financial publishing companies in North America. Jing has covered numerous aspects of the financial markets, from blue chip dividend stocks to small cap tech stocks to precious metals and currency. An avid advocate of investing for passive income, he wrote a monthly dividend stock newsletter for the better half of the past decade. In his spare time, Jing plays basketball, the violin and the ukulele.

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