2/23/2006

When The Smart Money Starts To Sell...

"I'd much rather play the ponies than the stock market. At least at the track you're not betting against the house."

Anonymous Punter


Barry over at The Big Picture posts about an ominous article he spotted in the Personal section of the Wall Street Journal titled "Individual Investors Shift Assets to Stocks". He quotes the article on the massive inflows of money to discount brokers and retail mutual funds, and then asks the money question:
"Are retail investors more likely to "pile into" equities at the very beginning of a Bull Market, or at the tail end of a Bull Market?"
The answer historically has been that retail investors jump into the market right as it is about to tank. Barry's post has plenty of data showing how retail investors take over the market just before it reverses (on both the up and down trend). Add this information to Paul Desmond's technical discussion mentioned in previous posts, and it makes the likelihood of an imminent bear market rise dramatically. Somebody's got to be on the selling end of all those retail stock purchases; who do you suppose it is?

I was in New York City on Black Monday in 1987. On the evening news a camera crew went into a tavern frequented by Wall Streeters to get their reactions. Most of them shook their heads sadly and lamented about what a tragedy it was. But one extremely inebriated fellow opined: "Win lose or draw, Filch, Pilfer and Snatch [not real firm name] always gets a commission." I hoped for his sake that his boss wasn't watching.

Anybody seen the Daily Racing Form?



posted by Mike at 10:52 AM


7 Comments:

Anonymous Jon said...

I think it was Templeton who said: "I want to be buying when there is blood on the streets".

Great post, Mike - and how true. I spent 3 years as a broker back in the mid-90's and true to form, people buy when prices are high.

Jon

4:21 AM  
Blogger Mike said...

Jon, you're absolutely right. The article linked stated that retail participation in the stock market reached its most recent low in February 2003, which as you can surmise was the absolutely best time to buy stocks. I guess the wisdom of certain crowds isn't so good.

9:28 AM  
Blogger fouro said...

Doesn't the Wisdom of Crowds go the way of the Wisdom of Individuals when the lottery effect comes into play?

May I coin a Law? The noise a market generates--markets for equities or ideologies or pet rocks--is inversely proportional to the long-term utility of the themes those markets are peddling.

Or, is it 'pedalling'? i picture a tandem or a rickshaw. The direction of travel is invariably towards a wall or over a cliff, with the passengers counting their iamginary chickens, oblivious to the fact that the driver is no longer on board.

12:28 PM  
Blogger Mike said...

Are the passengers oblivious, or just hoping that the driver was just taking a short break and will be back before they get to Dead Man's Curve?

7:06 AM  
Blogger fouro said...

yeah, the second one. I blame it all on being able to plug in a lamp and light comes out of the wall socket.

7:33 AM  
Blogger Mike said...

I blame Robert Cialdini and his "social proof". When our mothers ask "if everybody jumped off a cliff, would you?", we all say no, but in our hearts we know we will.

8:15 AM  
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5:15 AM  

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