Market Report: Smart Money Is Selling At The Fastest Pace Since 2007

Summary

Here’s how I approach markets based on 3 different strategies & time frames:

  1. Short term trend followers should continue to ride the rally because no one knows exactly when it will end. If you are a short term trend follower, you must use stops.
  2. Medium term contrarian traders should go neither long nor short. Wait. Risk:reward doesn’t favor long positions right now, while shorting into a speculative rally can end in disaster.
  3. Long term investors should be highly defensive right now. This speculative bull market may last another 6 months or even 9 months, but in 2 years time, long term investors will be glad they did not buy today.

Bottom line: trend is up, but beware of mounting risks.

Let’s keep our mind open to different outcomes by looking at both bullish and bearish factors.

Who is buying?

A day can’t go by without another multi-billion dollar IPO exploding higher. But while traders and investors are buying small & speculative stocks like there’s no tomorrow, almost no corporate insiders are buying their own stocks anymore. The corporate insider sell/buy ratio’s 50 day average is at the 2nd highest level ever. It was only exceeded by 2007:

In 2007, stocks rallied for another half year before an epic collapse began. This isn’t to say that “today is just like 2007”. The future is never just like the past. But even if we look at less extreme historical cases, the next 3-6 months saw mediocre returns for stocks:

Beware of risks like this, but also remember that the short term trend remains UP.

Momentum

Small caps and emerging markets continue to surge higher. Bloomberg publishes a “Fear/Greed” indicator, which is really just a momentum indicator (price drives sentiment). This Fear/Greed indicator for emerging markets is at the highest level since 2007:

This may seem scary, but Bloomberg’s Fear/Greed calculation is based on NOMINAL numbers. So as the market goes up over the decades, this figure will naturally become more and more extreme. Hence, it’s better to divide Fear/Greed by the market’s value:

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