Sunday, December 12, 2021

Get in Crash Positions

When the market goes bidless, it's too late to preserve capital, never mind all those life-changing gains.

Everyone with some gray in their ponytails knows the stock market has ticked every box for a bubble top, so everybody get in crash positions:



Let's run through the requirements for a bubble top:

1. Retail investors (i.e. dumb money) are all in and buying the dip with absolute confidence. As the gray-ponytail traders know, there are many moving parts to the retail dumb money going all in:

-- The pain of the last bubble bursting has finally faded and been replaced by greed as retail punters watch everyone else mint fortunes by buying the dip and gambling with abandon at the casino's trendy tables: crypto, NFTs, Mega-Tech, EVs, uranium, etc.

-- Prudence and caution (i.e. holding cash in low-risk accounts) are thrown to the wind as the more money you put into the bet, the bigger the rewards.

-- Punters realize the key to the really big gains is maxing out margin and leverage, preferably by foregoing owning the underlying equity in favor of options and futures contracts.

-- Confidence in the Federal Reserve's god-like powers and determination to never let stocks decline more than a few percentage points over a few hours or days is off the charts.

-- Confidence that this is a new era and so old rules no longer apply is in the stratosphere. Retail punters believe that cryptos, NFTs and blockchain are can't-lose bets as these are A) unstoppable and B) revolutionizing finance and the economy. As for stocks, retail traders have discovered the power of the herd: if the herd all buys call options by the thousands, this forces market makers to buy the underlying stocks, pushing the price higher in a self-reinforcing feedback loop that is guaranteed to succeed.

-- Retail investors view all these bets as extremely low risk and so there's no financial sense in hedging bets or limiting margin debt, leverage or risk, because risk has been abolished by the Fed Put.

2. Insiders (i.e. the smart money with asymmetric knowledge of what's actually going on beneath the surface PR) are selling with unprecedented enthusiasm: Ponzi? Insiders Dump Stocks To Their Own Companies At Record Pace.

The gray-ponytail traders know the only way to anticipate the next trend change and benefit from this knowledge is to follow what the smart money (insiders) are doing, not saying, because they know the smart money will always talk their book, i.e. promote a confident happy story about future prospects even as they're dumping their own shares as fast as they can without crashing an increasingly precarious market.

3. Market leadership shrinks from 50 to five companies even as the majority of stocks are faltering. The absolutely classic sign of a bubble top is the indices continue rising even as the majority of stocks stagnate or enter Bear Market territory with stairstep declines.

How can indices continue marching higher if 80% of stocks are falling? Easy: big gains in a handful of mega-cap stocks. The current concentration of market-moving heft in a few mega-tech stocks is unprecedented. Last week all three market indices--Dow-30, S&P 500 and the NASDAQ--were all led higher by one company, Apple, which added hundreds of billions of dollars in capitalization in a few days.

When the market depends on a Nifty Fifty for the vast majority of its gains, it's already getting toppy, but when it's entirely dependent on a Fabulous Five for gains then the top is in.

4. Short sellers give up and short interest falls to multi-year lows. The gray-ponytail traders can savor the irony: as short-sellers give up and the percentage of shares sold short dwindles, the retail Bulls declare victory: haha, we've wiped out the shorts and Bears! We won!

What the jubilant Bulls don't understand is the hated short-sellers were the last line of defense against a market decline gathering momentum into a crash, as shorts covering their bets by buying stocks are a reliable source of buying when greed turns to fear. Wipe out the shorts and there's nobody left to buy as stocks tumble and margin calls proliferate.

5. Buy-the-dip euphoria continues sucking in money even as market internals weaken and extremes of risk are ignored. When gamblers are putting all their capital on the table and boosting the bets with margin and leverage, the dumb money is all-in; not only do they not have any cash left, their sky-high margin debt guarantees even a modest dip will result in margin calls and forced selling: the self-reinforcing momentum everyone assumed could only be bullish reverses into selling that begets more selling.

6. Punters are confident that the Federal Reserve will manage to tamp down inflation while keeping the stock market at a permanently high plateau. Never mind rising real rates, never mind the need to reduce monetary stimulus as the only means to take the air out of inflation--the Fed will never let stocks decline. The Fed Put is unbreakable.

And so here we are: every box of a bubble top about to burst with unimaginable force is ticked. Traders sporting gray streaks in their ponytails know from experience that every bubble pops, and all the endless analysis after the fact boils down to: things changed.

Timing is everything in a crash: as Thomas Hobbes is reputed to have observed, "Hell is the truth seen too late." Well said, T.H.: when the market goes bidless, it's too late to preserve capital, never mind all those life-changing gains.


My new book is now available at a 20% discount this month: Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $8.95, print $20)

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.



Recent Videos/Podcasts:

XI's GAMBIT: A Bridge Too Far? (41 min, with Gordon Long)


My recent books:

Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $9.95, print $25) Read Chapter One for free (PDF).

A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
(Kindle $5, print $10, audiobook) Read the first section for free (PDF).

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($5 Kindle, $10 print, ( audiobook): Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake $1.29 Kindle, $8.95 print); read the first chapters for free (PDF)

Money and Work Unchained $6.95 Kindle, $15 print)
Read the first section for free



Become a $1/month patron of my work via patreon.com.




NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Robert B. ($100), for your outrageously generous contribution to this site -- I am greatly honored by your steadfast support and readership.

 

Thank you, Kingsley O. ($50), for your magnificently generous contribution to this site -- I am greatly honored by your support and readership.


Thank you, Michael S. ($50), for your marvelously generous contribution to this site -- I am greatly honored by your steadfast support and readership.

 

Thank you, Gaylan P. ($5/month), for your exceptionally generous subscription to this site -- I am greatly honored by your support and readership.

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.


Our Privacy Policy:


Correspondents' email is strictly confidential. This site does not collect digital data from visitors or distribute cookies. Advertisements served by a third-party advertising network (Investing Channel) may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative). If you have other privacy concerns relating to advertisements, please contact advertisers directly. Websites and blog links on the site's blog roll are posted at my discretion.


PRIVACY NOTICE FOR EEA INDIVIDUALS


This section covers disclosures on the General Data Protection Regulation (GDPR) for users residing within EEA only. GDPR replaces the existing Directive 95/46/ec, and aims at harmonizing data protection laws in the EU that are fit for purpose in the digital age. The primary objective of the GDPR is to give citizens back control of their personal data. Please follow the link below to access InvestingChannel’s General Data Protection Notice. https://stg.media.investingchannel.com/gdpr-notice/


Notice of Compliance with The California Consumer Protection Act


This site does not collect digital data from visitors or distribute cookies. Advertisements served by a third-party advertising network (Investing Channel) may use cookies or collect information from visitors for the purpose of Interest-Based Advertising. If you do not want any personal information that may be collected by third-party advertising to be sold, please follow the instructions on this page: Do Not Sell My Personal Information


Regarding Cookies:


This site does not collect digital data from visitors or distribute cookies. Advertisements served by third-party advertising networks such as Investing Channel may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative) If you have other privacy concerns relating to advertisements, please contact advertisers directly.


Our Commission Policy:

As an Amazon Associate I earn from qualifying purchases. I also earn a commission on purchases of precious metals via BullionVault. I receive no fees or compensation for any other non-advertising links or content posted on my site.

  © Blogger templates Newspaper III by Ourblogtemplates.com 2008

Back to TOP