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Are You the Smart Money or the Dumb Money?By
Friday, August 14, 2009
Corporate insiders are selling...
The ratio of insider sellers to buyers reached "the second-highest extreme of the past six years," my friend Jason Goepfert reported yesterday on his website www.sentimentrader.com. Who knows more about a business and its prospects than the insiders? Nobody. So when corporate-insider selling hits an extreme, it's a danger sign for the market. Meanwhile, individual investors typically know less about investing than larger investors. And Jason also reported yesterday that individual investors are particularly excited about stocks again: "The percentage of respondents in the American Association of Individual Investors survey moved to... one of the most extreme [bullish] readings yet of the bear market." The message here is simple... The smart money (corporate insiders) is selling. Meanwhile, the dumb money (individual investors) is excited about stocks. The dumb money is buying. Which group are you in now? Are you selling stocks, or buying them? Are you with the smart money or the dumb money? Me? I'm with neither group... Here's why: Corporate insiders often sell too early. They sell when they're scared... but the market usually continues higher for a few more months after they've sold. As I described two days ago here in DailyWealth, I believe I can catch those few more months (if they happen) – as I know they can lead to "blastoff" type gains. I hope to keep most of my gains by using tightened trailing stops. Meanwhile, individual investors have been buying... and they've been right so far. Yes, we've now reached an extreme level of optimism for individual investors. But the trend in the market is still up. The trend is a powerful thing that can (and often does) go to a more extreme level than anyone imagines possible. The old saying is true... Don't fight the trend. So I won't. We've had a fantastic bull run since March. And we're seeing the classic signs that it's near its end... The smart money is selling and the dumb money is buying. You shouldn't ignore those facts. But we do have an incredible situation... The Fed cut interest rates to zero (which helps just about all assets soar in price) and we have a strong uptrend in stocks. You can't ignore those facts, either. Right now, the Fed and the uptrend are trumping the reality of the smart and dumb money. So I'm staying in stocks. But as I explained two days ago, I'm moving a lot closer to the exit door... Good investing, Steve
Further Reading:
The Market's Beginning a Final Blastoff Market NotesWE'RE GETTING CLOSE TO THE DANGER ZONE
An update on last week's claim that it's "amazing what several trillion dollars will do to goose an economy."
It is not just amazing... It is truly, absolutely stunning what several trillion dollars will do to goose an economy. For proof, have an updated look at our frequent guest, copper. As we mentioned last week, governments around the world are injecting huge amounts of money and credit into the struggling patient known as the global economy. All this Monopoly money is driving rallies in stocks and bonds. It's also driving a stunning rise in copper... the major building block of cars, refrigerators, power lines, computers, and houses. The metal is up 97% from its February low... and up 27% in just the past month. Any sane person must be worried about all of this "funny money" debasing their paper currency... which will push up the nominal price of commodities like copper. Again, we encourage everyone to keep an eye on the $3-per-pound area. It is around this point that the market is saying, "looks like we have a dollar problem on our hands." |
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