Did Retail Buy the High?

Posted On March 22, 2017 1:36 pm

The S&P 500 Index’s record 109 day run without 1% decline was broken yesterday. 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 sellers and asked if Retail Would Be Left Holding the Bag? My quick answer is No! With the caveat things might have changed in the near term, but longer term the market should still continue its upward trajectory.

Yesterday’s sell-off did do some technical, and probably psychological damage, but it 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 its 20 dma and broke the ostensible uptrend since the election.

One of the concerns of the recent run was it was leading to a blow-off top. Yesterday’s action helped to dissipate the growing greed and FOMO, or fear of missing out. Sentiment gauges such as the Fear & Greed Index 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 causing everyone to scramble to buy.

If the S&P 500 can successfully test its 50 dma near the 2300 level in the next few days, it would be 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.

One of the data points being passed around is that last week the stock equity portion of households assets have hit 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 the range.

Is it a sign the bull market is at an end? The short answer is no. It’s important to note 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 conversely why equities as a percentage of households assets pretty much bottoms at market lows.

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, putting money into the money on a regular and consistent basis. So, while the 30% level may mark the level households feel comfortable allocating to stocks, (excess money may flow into other assets such as real estate) it by no means is a harbinger of a 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. Yesterday’s 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 just since the 2009 low.

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.

About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.