You have been warned: do NOT chase this rally. To be sure, stocks can go higher and may yet for a few more days, even weeks, but we are seeing some very troubling signs of what may lay ahead.
Without getting all doomy and gloomy, there are events taking shape, some of which are already in place, that will likely cause a market downturn; one which could even rival, if not surpass, that of 2007 - 2009 in intensity. Yes, we all know about the geopolitical risks in the Middle East and the Ukraine. Yes, we know that Germany's economy is contracting, Italy is again collapsing, and the Euro is at new 4-year lows. Yes, commodity prices are falling again on weaker demand. Yes, interest rates are at historic lows, and market complacency is at historic highs. Yes, the labor market is stagnant, pricing power is stagnant, and Q3 earnings expectations, like the GDP, are likely to be revised downward in the coming weeks. And yes, technically speaking, the current relief rally is unsustainable, overbought, too "wedgy", and showing bearish divergence in both momentum and volume.
But there is ONE STAT that may well trump them all. Just looking at the chart below should give all bulls concern. It shows that the number of retail trading accounts, those that hold the so-called "dumb money", are at an all-time high! Retail traders are called "dumb money" unfairly, of course. Perhaps a better term is the "late to the party" crowd. The "chase the strongest trend" crowd. The "I better get in now before it's too late" crowd. Follow the investing trends of this crowd and you have a nearly perfect contrarian market timing tool. When the retail crowd piles into the markets in droves, it's time to start scaling back on your exposure. When the retail crowd has sold everything and put its money safely into CD's, it's time to put your money back in stocks. And when the retail crowd hits NEW ALL-TIME HIGHS of involvement in the markets, as they just did, it's time to stay on alert and protect yourself against a crash.
Take a look at the following chart:
Note the 2007 peak, the 2009 trough, and the extreme high at present. What this is telling us is the following:
- The number of retail accounts opened at E-Trade (in blue - left scale) is at a new all time high
- The $ amount of assets in retail E-Trade accounts (shown in red - right scale) is also at a new all-time high
- Both measurements are placed well above 2007′s peak, just prior to the 2nd worst crash in market history
- The number of people opening E-Trade accounts is growing at nearly 5%/year, well above their historical yearly average
The conclusion is this: those 3.1 million retail traders, taken as a whole, form an even greater mass of engaged, expectant, even greedy market participants than were formed by the group of 2.4 million retailers of 2007. And we all know how that tale turned out. If history is anything to judge by, this is a very troubling statistic….if you happen to be bullish.
The moral of the story? Stay market-neutral, trade both sides of the market, protect your profits. Buy volatility, short greed, and sell premium. Better yet: join our several hundred subscribers who are getting poised to profit from the coming downturn! Stay with us and learn how to be an options seller, a momentum shorter, and a buyer of stocks the markets pay you to own!
Time and economic forces will bring this market down soon enough. Let's make sure they don't bring us down with them. Down be a trend chaser, a "must buy now or miss out" trader like the retail crowd. Stay ahead of the markets. React to what is on the horizon, not what lies behind. And come learn with us how to profit from the markets next big move!
Happy trading and blessings to all, Tom Carr ("dr stoxx")