Did Retail Buy the High?

Steve Smith Headshot (1)The S&P 500 Index’s record of 109 day run without a 1% decline was broken last week. It’s causing hand wringing and top calling bell ringing.

Pundits are noting Trump’s State of Union Address was the high and now suddenly the concerns over “what if Trump’s policies and promises don’t come to pass” are becoming a real concern.

Earlier this month I noted how individual investors we finally buying into stocks just as hedge funds, institutions and insiders were net seller and asked if Retail Would Be Left Holding the Bag?

My quick answer was No! With the caveat that things might have changed in the near term but longer term the market should still it’s upward trajectory.

Last week’s sell-off did do some technical and sentiment damage but that is probably healthy in the long term. The Nasdaq 100 put in a new high only to reverse lower ( a bearish reversal) and the S&P 500 snapped it’s 20 dma and broke the ostensible uptrend since the election.

It then rallied but failed to recapture the 20 dma or post-election trendline.

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One of the concerns of the March rally was it was leading to a blow-off top.  Last week’s selling helped to dissipate the growing greed and FOMO or fear of missing out.

Sentiment gauges such as the Fear & Greed Index http://money.cnn.com/data/fear-and-greed/ swung from sharply from the former to latter.  In fact it would be helpful if we could get a few more down days rather than a “one day wonder” which leaves a “V” bottom caused everyone scrambling to get buy.

So far the S&P 500 has successfully held the 50 dma near the 2300 level which is positive towards building a new base for a fresh and more sustainable leg higher.

Is Everyone All In?

But people are wondering not only if all the potential good news is priced into current prices but if everyone is already all in, and at these elevated levels.

Recent money flow data suggest mom and pop retail investor, who have been very reluctant to buy stocks in the years since the financial crisis may finally be embracing the bull.

Maybe it’s the headlines of new highs and positive reinforcement of growing 401k balances that have stirred the animal spirits that have them piling in.  But it comes at a time when professional and institutional money managers are pulling their horns.

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Another of the data points being passed around is that last week the stock equity portion households assets have hit the 30%; this the same proportion as they held at bull market peaks in the 1960s and in 2007 and basically represents the top end of range.

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Is it a sign the bull market is at an end? The short answer is no.  It’s important to note that the households’ equity ownership is a function of the market value of their holdings; meaning the percentage it represents increases as stock prices appreciate.

Which helps explain why conversely why equities as a percentage households assets pretty much bottoms at market lows.

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It’s not that people are selling the low (though I’m sure many do panic at bad prices) and buy the high, but rather this data point simply tracks the market.

And for the most part individuals tend to follow the long term plan and putting money into the money on a regular and consistent basis.

So, while the 30% level may mark level the households feel comfortable allocating to stocks, (excess money may flow into other asset such as real estate) it by no means is a harbinger of market top.  In fact, two of the last three times the purportedly significant 30% level has been reached, stocks gained another 40-60% before topping out.

This is not to say there won’t be pullbacks.  March 21, a 1.25% decline was indeed THE WORST DAY of THE YEAR!!!  But keep in mind the worst day for each of the past 30 years was in excess of a 3% decline and there were multiple occurrences.

For those with a long term horizon this is a good chart to help maintain equanimity during times of turbulence.  Here’s all the reasons you could have had to sell.

r2s

There will be more red dates along the way but I’m pretty sure the chart will move up and to the right over time.

Kind Regards,

Steve Smith

Steve Smith is an expert options trader with 25 years experience in the markets. Steve was a seat-holder of the Chicago Board of Trade (CBOT) and the Chicago Board Option Exchange (CBOE) from 1989 – 1997. Steve is currently the editor of The Option Specialist and runs the 20K Portfolio Program which provides all types of options trades for all types of traders.

 

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