Do Stock Sellers Understand Something That Recent Buyers Do Not?

Is the stock market going up because there are more buyers than sellers? No. There are a fixed number of shares in the marketplace. For every buyer of a share, there needs to be a seller of the asset. In fact, a transaction cannot occur without each participant – each buyer and each seller – playing a role in a trade.

So why is the U.S. stock market relentlessly powering ahead? Shareholding sellers are only willing to accommodate eager buyers at significantly higher prices.

In other words, the story line that buyers outnumber sellers erroneously claims that more people are getting into stocks. That’s not the case. Those who are selling a stock asset at this particular moment are in the proverbial driver’s seat. They are letting go of some of their holdings at all-time record highs to those who are willing to pay almost anything to chase year-end performance.

Why is this an important distinction? Primarily, some stock owners must believe that the “Trump Effect” is close to running its course. It follows that sellers who reduce equity exposure when buyer exuberance borders on irrationality may have more cash in their portfolios for future opportunity. Perhaps they will employ cash to acquire stocks at significantly lower prices from today’s irrationally exuberant folks who become tomorrow’s illogically pessimistic liquidators.

Who, then, is selling stock? Consider prominent prognosticator and media-dubbed bond king, Jeffrey Gundlach. He believed Trump would win the presidency when few others anticipated the result. He accurately anticipated a surge in stock prices as well as a spike in rates. Now, however, Mr. Gundlach feels the excitement is overdone. “The dollar is going to go down, yields have peaked and will move sideways, stocks have peaked as well and gold is going to go up in the short term.”  

Regardless whether the performance chasers have it right or whether the sellers of stock are accurately predicting a pullback, globally diversified investors may be feeling as though they did not receive an invitation to Trump’s party. Imagine having 60% in a global mix of stocks (one-half of which is dedicated to U.S. equities) and 40% in a global mix of bonds (one half of which is devoted to U.S. bonds). How do you think you would have done from the election up through December 5?

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Disclosure: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered ...

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