Greed and/or Stupidity
What do you get when you combine extreme greed with an extended stock market rally?
No it's not a trick question or the start of a bad joke.
A correction of course, how severe? Well that depends upon how long both the state of extreme greed and rally continue.
The longer it goes on the greater the correction will likely be.
So how greedy are we currently talking?
well regarding the stock market and according to the greed and fear index from cnn money, quite greedy indeed.
So where are we in relation to the level of greed prior to the correction in January?
Well let’s take a look.
We are pretty much back where we started.
The US stock markets continue to push higher and finish out the summer with 2 out of the big 3 (NASDAQ 100 & S&P 500) above the previous yearly high set back in January before the sharp correction that month. The Dow Jones bringing up the rear sitting a few percentage points short of a new all time high.
Well what does this mean?
It essentially means that US investors are highly confident/complacent currently and can perceive no reason for things to change.
This in itself to a contrarian is an indicator of a change in the making but when taken with the fact of greed approaching extreme levels combined with the currently overextended position of the market, leads me to believe that a corrective move is on the horizon.
These same investors have put the trade war fears from earlier in the year behind them and are completely sold on the narrative of US economic growth and prosperity, or as Trump calls it “The strongest US economy ever in history”.
But I think the assumption that trade war fears are gone is a mistake.
However If you have brought into this narrative and believe what the President says then why would you have any fears?
Well because it's bullshit.
The US has gone from the world's biggest creditor nation to the world's biggest debtor nation in roughly 35 years and the dollar has devalued about 90% in that time, (that's what happens when you just keep printing it with nothing to back it) has a trillion dollar deficit and $21 trillion of debt. But I digress that is a story for another time.
So who are these fearless and confident investors? Well the retail sector of course (dumb money).
So how about we stop for a minute and examine what the insiders of these companies are doing with their shares.
Below is a summary of insider activity in the FANG (a significant force behind this current market rally) stocks over both the last quarter and the last 12 months.
However this story is not isolated to just these stocks but can be seen again and again throughout this record breaking bull market.
And lets also have a look at our first ever trillion Dollar stock APPLE (AAPL)
As you can see insiders are not sold (pardon the pun) on the idea of the market going higher but are happy to lock in their current profits and sell their shares to the suckers, sorry I of course mean intelligent and discerning retail investors.
We can see the only company out of the group insiders are buying is Facebook, maybe because it recently had the shit kicked out of it and actually looks like a discount by tech standards.
I feel compelled to do as the Smart money is doing and not to join in this buying orgy of excess.
So how does the rest of the world see the current state of the global economy surely just as confidently as the US does right?
Ermm.. not so much, China is already in a bear market and other emerging markets have been getting crushed by a strengthening dollar.
In fact just this week we have seen an interesting development in the FTSE 100 and the DAX 30. The UK market has now fallen below all major moving averages and broken a major supportive up trend and looks technically setup to head a lot lower. The German stock market is also below all major moving averages and looks set to head lower. Both of them in contrast to the US markets are lower than their highs earlier in the the year.
Are we witnessing the UK and EU markets gradually sleepwalking into a bear market? I believe so.
So we actually did have have some gains in the form of our UK100 and GER30 index shorts this week and I expect this to continue.
The dollar has bounced after a couple of weeks of selling but I think this is temporary and its decline will continue further. This will continue to take pressure off of commodities such as GOLD and SILVER and OIL too.
Our currency trades will also recover against the dollar given time.
Meanwhile the crypto market continues to show stronger signs of recovery but perhaps still a little to early to speak of a big bull run but I do believe it is coming.
It is true given the current level of what I perceive as complacency, that the market could continue higher and the pain for us might not yet be over, but as I stated earlier the higher the climb the harder the fall.
It is always difficult to go against the herd especially when they are making a profit but I have to trade the situation as I see it. I am not eager to buy into the longest bull market in history under these current conditions and would rather remain in this defensive posture, positioned for the long term and what I believe to be inevitable.
I know it has been a rough year so far and many have lost faith or believe that recovery is not possible from this position but I assure all of you it is not only possible but in my estimation a certainty along with very nice profits.
I am after all in this game for life and my patience is measured on this scale.
There will come a time perhaps not so far in the future when we will return to the stock market, but it will be as bargain bottom buyers rather than unfortunate HODLRS as our crypto experience has reaffirmed.
This of course is just all my opinion and you must make up your own minds as usual.
Take care all.