This morning the Dow broke its all time record high -- set in October 2007. Can the S&P 500 be far behind? And is this the early stage of another great bull market? Let's look back at the two previous times when the S&P 500 set new all-time highs and see if we can learn something. Wait...first put your "this time it's different" glasses on. OK, let's go.
In early 2007, corporate insiders were dumping their shares at a manic pace (see the red line in the graph below -- the ratio of shares sold to bought by corporate insiders). They continued to sell big into each successive market rally as the year went on, but at a progressively less panicky pace. While this was happening, retail investors were busily buying (part of the retail investor buy high sell low stigma). The S&P 500 rallied early in the year, took several breathers throughout the year, and achieved a new all time high in July 2007 and again in October 2007. We know what came next. Who suffered the brunt of the losses? Retail investors. Someone has to lose.
Let's back up further to the previous all time high in U.S. stock markets: year 2000. The S&P 500 set a new all time high in March 2000, then would go sideways and approach the same level in July and August. Not much different from the 2007 script. Corporate insiders were again dumping their shares and selling into rallies. How about the retail investor? Well, they had not yet been burned by the 2000-2003 crash nor the 2007-2009 crash, so they were buying shares at a record pace in March 2000. You recall what came next.
That's the perfect segue into 2013. The last time retail investors were buying stocks as heavily as they were in January and February this year was...drum roll please...March 2000. Once again, corporate insiders have been dumping their shares -- at new all time record rates! There's ratification for you (no pun intended).
What might you do with this knowledge? Lots of things:
- Sell your long risk assets (common stocks, REITs, junk bonds, commodities) - or dramatically reduce the exposure.
- Buy safe havens: short-term AAA corporate bonds, short-term T-notes.
- If you're a risk taker, you could consider such things as the VXX or SDS. But be warned. They move fast. I would not venture into VXX or SDS until the April rally. Assuming there will be one.
The third time's the charm -- as they say. Tragically.