Retail Investors Should Get Out of U.S. Stocks - Now

The S&P 500 (SPX) has risen too far and too fast thanks to all the liquidity overflowing in the markets. But it will be a prudent move for all the retail investors and people who actively manage their 401(k) to get out of the US stocks now. All the news of them sitting on the sidelines are a gimmick to lure the remaining retail investors into this frothy market and make profits from them.

I don't think the market has any more room to rise further unless governments are now switching their policies to directly invest in stocks. A quick look at the results of Bank of America (BAC), Citigroup (C) and even Goldman Sachs (GS) is a clear indication of the frothiness of this market. These banks booked huge profits in the investment banking divisions while still bleeding in the actual core banking businesses. But given the 60% rise in the S&P500 in the past 6 months and an almost 10% rise every month, does it come as a surprise that these banks made high profits in investment banking business? Not at all.

However, the significant question now is what lies after this. I wonder how many people believe that the S&P500 will rise another 60% in the next 6 months and will repeat this performance over and over again in the foreseeable future. I personally don't believe in this scenario. In my opinion these banks will now be left with very modest, if any, profits in their investment banking division and still handle the mounting losses in their core banking business. So it would not be a big surprise if the results in the next quarter (Q4) are very ugly again. Especially given that foreclosures in the past 3 months hit new record highs and the unemployment rate in the USA is still hovering around 9.8%.

I don't buy the growth story of India and China either because both these economies have not shown a true independence from the economies of the US and other developed nations. In fact India is in a much worse shape given its highest valuation of the BSE sensex among all emerging economies. Also India is a service industry driven economy which solely relies on growth in world business and not just basic consumers, as opposed to China's cheap manufacturing driven economy.

Given the highly overbought situation of almost every market around the globe, I think investors will not be able to find many buyers if a downturn of even 10% takes place at these levels. This will clearly mount an enormous selling pressure on both stocks as well as commodities.

So retail investors should start booking good profits when there are still buyers out there. I am very cautious about stocks in the US and India and some metal and mining sectors like Gold and copper. Gold is an inflation hedge only as long as there is a possibility of return of the days of gold standard. This, in my opinion, is a highly remote possibility given the focus of governments all over the world in printing more of their money. Apart from the fact that gold is simply a metal which has very minimal uses in our lives. So I see a significant downward pressure in gold prices and gold ETFs (GLD) at this point. So the best approach overall is to book profit while the market is still going up and to hold some cash.

Disclosure: No position at the time of writing in the stocks and ETFs discussed in this article.

Comments

[Uppai Mappla:]

". . . India is a service industry driven economy which solely relies on growth in world business and not just basic consumers . . ."
The author shows amazing ignorance about the Indian economy. How did SeekingAlpha allow this article to be published?

Oct 20 11:25 AM

[davidbdc:]

And get into what exactly?

1% CD's at my local bank......and why do you think people expect another 60% rise in the next 6 months? I expect that the stocks I've bought this year will increase their earnings, continue to pay me dividends and slowly appreciate in value as the earnings increase.

And 3 banks don't make the market.

I'd suggest the author sell whatever he holds and buy PEI, collect the dividends over the next year or two and then rationally consider how to invest going forward.

Oct 20 05:15 PM

[richjoy403:]

It is always prudent to take some profits when the market has made a strong advance.

However, it seems the author wants to appear to make a strong case for going to 100% CASH...perhaps so he can claim some fame if there were a black swan event resulting in a 40% decline.

However, his close betrays his message..."So the best approach overall is to book profit while the market is still going up and to hold some cash". He is trying to have it both ways!

Oct 21 08:19 AM

[Frugal Joe:]

When the Chinese premier Wen Jiabao and the Chief of Bank of China warned their people against,"Blind Optimism" my heart skipped a beat remembering the Massive Internet Bubble which destroyed millions of small investors as well as large corporations......

This article makes more sense then the Spin and Rhetoric we hear every day from politicians and Wall Street.

GL!

Oct 21 03:43 PM

[Albertarocks:]

In all honesty, I don't think the retail investor has even participated to any great extent in this market yet... or he's already out. Here's why I'm thinking this might be the case:

Ever since this market started its rally, volume has been declining steadily pretty much from the second week or so. And all along the way, who can't remember literally dozens of late day or late week "stick saves"? They were remarkable in their consistency and in their timing. Every single time one of these stick saves occurred, we saw every single index and every single sector receive a sudden and massive injection of buying at exactly the same second on the clock. I'm not exaggerating, I mean "at the very same second on the clock", every single time.

I don't know of any retail investment club or group of friends or any retail entity who could possibly pull that off, even if they had the resources. There's only two or three groups who could inject enough money to cause spikes like that... insurance companies perhaps, pension funds, or GS and its tribe of pump jockeys.

And then there's this little tidbit! There were many, many days where 40% of all trading volume was in 4 zombies, City, GS, FNM and JPM (I could have one of the names wrong but that's beside the point... it was the banksters). With flash trading and all sorts of nonsense they were buying and selling each others shares back and forth. I'm not exaggerating, here are some details that are accurate:

Throughout August, the average daily volume on Citigroup was an astounding 1.1 billion shares. Every single day for an entire month! But to top that, on Aug. 26th, the number of Citi shares that traded hands was 2.15 billion. BILLION! That represented a full 26% of all shares traded on the NYSE that day. Astonishing! And blatant! To say the pump jockeys were working overtime on that day would be an understatement.

And all along, we've been hearing about how the "dumb money" will come into the market at the top end. By my way of thinking, either we're nowhere near the top because the "dumb money" hasn't really been "extracted" from the "idiots" yet - OR - we're at a major peak in the market and the "dumb money" isn't so dumb after all. Is it possible that the retail investor has learned from hard earned lessons of the past and is waiting for the inevitable correction that should have happened somewhere along the line, but to this date hasn't?

I think the banksters may have pumped this market up with so much enthusiasm and panic, all along trying to suck in every dollar possible from the public, that they may have actually failed in their quest, due to their own greed. In never giving the market much more than a few moments at a time to take a breath, I think it's possible the public caught on early and may have been selling into the rally.

Maybe its just wishful thinking, but I'd like to think that you and me and all the other "retail dumb money" managers of our own little accounts know better by now.

Oct 21 05:43 PM

[Mayascribe:]

Rocks: Great comment! I have noticed exactly the same thing when my stock tracking service would blip all green exactly at the same moment many days in a row during August. When my sister was visiting, I had her sit next to me and watch, and sure enough, my puter turned all green exactly when I predicted it would. Blew her away.

The market will continue bumpily along higher.

Today's Bove's Wells Fargo comment was nonsense. If it wasn't, then the after hours would be down more than a nickle.

First thing I'm going to do after brushing the coming Phillies hangover out of my mouth tomorrow morning, is to check the dollar.

Oct 21 06:00 PM

[Swashbuckler:]

If I'm a retail investor invested in stocks in this market there is no way I'd dump as long as the trend up remains intact. But I would be VERY ready to bail if conditions break down. Hand on the trigger, as it were. IMO.

Oct 21 06:35 PM

[Albertarocks:]

On Oct 21 06:35 PM Swashbuckler wrote:

> If I'm a retail investor invested in stocks in this market there
> is no way I'd dump as long as the trend up remains intact. But I
> would be VERY ready to bail if conditions break down. Hand on the
> trigger, as it were. IMO.<

That's a critical and smart strategy. Keep your finger on the pulse and be nimble as hell.

Oct 21 06:52 PM

[SAS70:]

Rocks Right On!!

Swash I agree with you might as well hang on for the ride. Key is of course not to get run over. Hand on trigger as well.

Oct 21 07:00 PM

[richjoy403:]

Again, the author tries to have it both ways...first he says "get out of US stocks now"...he sets up a straw man "the market can't be expected to go up another 60% in the next 6 months" (DUH!, that should convince us to get out now?)...than he says other markets (including China and India) should not be invested in either...than he says "don't buy commodities or gold"...finally, he says to "book profits and hold SOME cash". He does not say what else to hold in addition to some cash (perhaps bonds?).

The economy is cyclical; we have seen the bottom of this cycle, and are on the upswing. There will be corrections (and we are due one); if you are truly nimble enough, you might sell ALL your stocks at the right moment, and buy back again at the right moment (good luck with that round trip).

I agree the retail investor is only now getting (back) into the market. But I don't subscribe to Albertarocks' suggested conspiracy theory.

Evidence suggests it is in fact retail investors, rather than institutions, who bid up those zombies--and kept buying GM after it was known equity would be wiped out in bankruptcy.

But, Albertarocks, if you truly believe as you suggest, put your money under your mattress or bury it in your yard.

Oct 22 07:05 AM

[SeekingTruth:]

Gold Digger,
Your concerns are well reasoned but not necessarily prophetic.
Nevertheless, anyone having high cash needs within the next two years or so would be well advised to take heed.
Many fundamental and technical indicators are flashing caution signals, and some are shouting.
Full attention is warranted, and the casual, or too busy to stay alert small investor could get badly hurt (again).

Oct 22 10:26 AM

[SeekingTruth:]

To Khargosh,
Thanks for your POV.
Yes, I gree that many people are expecting a fall, and are investing accordingly.
My comment was mostly for young very busy investors who may getting beguiled with current momentum plays.
In that respect, I meant what I said and stand by it.
More experienced investors better know the risks, can take skilled defensive measures , and should as always , name their own poison.
The author did his best, and I still appreciate his efforts.

Oct 23 12:11 PM