In /etc/rc.d/init.d/squid, lines 34-38 say

# determine which one is the cache_swap directory
CACHE_SWAP=`sed -e ''s/#.*//g'' /etc/squid/squid.conf | '\
        grep cache_dir | sed -e ''s/cache_dir//'' | '\
        cut -d '' '' -f 2`
[ -z "$CACHE_SWAP" ] && CACHE_SWAP=/var/spool/squid


By default, the grep fails because the cache dir line in the
/etc/squid/squid.conf  file is commented out.   Namely:

#cache_dir ufs /var/spool/squid 100 16 256

If a  cache_dir  line is added which contains extra blank space around the
"ufs" or directory field, then the   cut  will select the blank space and
so CACHE_SWAP will be empty and then erroneously re-set to 
/var/spool/squid.

(I know because this happened to me)

My suggestion is to change the  cut  command to   awk ''{ print $2 }''
which unlike cut is tolerant of multiple blank spaces.  

/'\ndy