EC Market Report: Who Is Buying And Selling Stocks

Looking back, 2020 was a year that few will forget. From a markets point of view, it was a year in which “dumb money” (traders who chase trends) was the smart money. Global central bank intervention caused a “wall of money” to flow from one asset to another, resulting in a year when “everything went up”.

Market participants can notice a dangerous trend over the past 2 months. The riskier an asset is and the less intrinsic value it has, the better the asset has performed since November. Moreover, this “wall of money” is not infinite, and is flowing into assets with smaller market caps.

Summary

Here’s my market outlook based on 3 different time frames:

  1. 2021 will be a dangerous year for long term investors (2+ years time frame). Even if stocks continue to rally, the eventual stock market decline will still fall below where the S&P 500 is today. That will allow long term investors to buy back their stocks at a lower price.
  2. Medium term traders should remain defensive in Q1 2021. The rally may continue for another month or two, but risk:reward is not favorable for bulls here.
  3. Short term trend followers should remain long but heed their stops when the market does eventually correct.

Explanation

Several important factors suggest that we’ll see a significant correction in 2021. At the same time, I do not think we’ll get a 2000-2002 or 2007-2009 bear market.

Who’s buying?

Not institutions. The number of institutional buyers for SPY (S&P 500 ETF) has fallen significantly in the past half year while the number of institutional sellers has risen significantly.

Institutional sellers can sell early, so this is more of a risk for February and March 2021.

 

Similarly, the # of institutional sellers in QQQ (NASDAQ ETF) surged:

Insiders aren’t buying either. Our Insider Buy/Sell ratio’s 1 month average remains in the bottom 4 percentile of all readings.

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Frank J. Williams 3 weeks ago Member's comment

Good read, thanks.