Another Delusional Moment

Men are children. They must be pardoned for everything,
except malice.


A litany of ills affecting the markets commands our attention:

For the third time in less than fifteen years, investors are behaving in a fashion that historically has produced miniscule, temporary upside payoffs, followed by catastrophic endings. Of course, they do not believe it. Otherwise they would be sitting in cash.

They are definitely not in cash. In February, individual investor money market assets as a percentage of total U.S. stock market capitalization was 2.8%, an all time low. In 1982, before the Dow Jones Industrial Average went up sixteen thousand points, the figure was 17% (source:

Stock market gambling is in vogue again-day trading has come back strong. From October through January E*TRADE and TD Ameritrade have reported trading increases of 25%. This is a late-in-the-trend phenomenon, self-killing because it is really day buying, which has a limited life. A 63-year old retiree says she traded in and out of stocks about 40 times this year. “I think stocks are the only piece of the American dream that’s still working,” she said. Good luck, ma’am.

Most indicative of the end of the line for the market mania is the sudden “flight to risk” in the form of heavy buying of exotic “Frontier” markets like Chad, Bangladesh, Bulgaria and Ukraine (!). Bad bets, all of them-last to skyrocket, first to crash, for certain.

As is typical at tops, economists are unanimously optimistic, blithely ignoring the danger signals: When Christmas sales got off to a rocky start last year, retailers panicked and went into “full battle mode” to unload merchandise. In January and February, various retail sales measures crossed into negative territory for first time since 2009. (Elliott Wave Financial Forecast, 3/7/2014).

Auto sales declined in four out of the last five months. The major auto manufactures started February with more than a hundred days supply of unsold vehicles, the most since February 2009 (EWFF, 3/7/2014).

The employment situation is worsening. The market popped a bit last Friday when the Employment Situation Report was headlined “175,000 jobs added.” Most of the gains faded as traders took a closer look: per the Household Survey, employment was +42,000 and unemployment was +223,000. Mish did his usual thorough job of parsing the report:

“Were it not for people dropping out of the labor force, the unemployment rate would be well over 9%.”

At market tops, popularity is the kiss of death: At it’s all time peak in December 1999, Microsoft was the most widely held stock in America. It was already losing ground as the market topped in March 2000. After a 70% drop in 2000, the stock had one sharp rally, a dead cat bounce, and it’s been a dog of a stock ever since:


MSFT last

So, in the here-we-go-again department, MSNBC reported in November 2013 that Apple was the most widely held stock in 401k accounts. APPL peaked the year prior and sold off 45% in a matter of months. It now badly lags the broad market, and may have completed it’s own dead cat bounce:

Apple last

Will it be a coincidence if Apple and the broad market behave abysmally for some time to come? Hardly. Wasn’t it Mark Twain that said, history doesn’t repeat, but it does rhyme? The names may change but mass behavior is constant. The most popular stocks always crash ahead of a broad market decline. This time should not be different.

If I could think of any way this would not end badly, I’d say it. I can’t.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

This entry was posted in On Markets, Socionomics. Bookmark the permalink.