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The replacement factor is figuring huge here, because without a pullback, the cash is just killing managers. If you take your cash position up, say, to 10%, the stocks you do own have to do an awful lot of heavy lifting in order to stay pace with the S&P 500. Forget beating it; that's almost impossible.

So you sell, because of the FBFH, and it doesn't strike, and the market keeps going, and you have to put something back on. You can either admit defeat and go right back in at a higher level, or you trade down and risk the replacement factor, like the replacement referees at the NFL or the replacement players during the NFL players' strike.

For many portfolio managers, this is a new phenomenon. They know markets can't keep going up like this. But they also look at their run-ups, and they see the basis points growing between the red-hot averages and where they are, and they start taking risks and trading down.

It is only after they have traded down -- putting that sidelined capital to work, and thus finding themselves in inferior merchandise, or without any shorts -- that the market can have a serious correction, even if we do not see FBFH. In other words, at any short-term pop you tend to have less cash and more subpar names, simply because you layered on replacements to stay closer to the S&P.

I think the replacement army is out there in a lot of portfolios. Just stick with the quality, even if it means eating some crow. The really bad stuff that you might be cycling into will simply not hold up as well when we do see a pullback.

Yep, staying up with the averages now is almost impossible if you are a prudent manager. But don't compound it by replacing the good with imprudent choices of hitherto underperforming stocks. You can only imagine what happens to those when we do get the FBFH!

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