Tsunami Warning

A tsunami is a wall of water that wipes out everything in its path, typically caused by earthquakes. But first, the water actually disappears from the usual shoreline, leaving land where there should be sea.

If you are on the shore and see that happen, the correct response is to run for high ground. Tragically, though, people often rush toward this new and unusual sight. It’s hard to blame them; we humans are drawn to the unknown. This impulse explains much of our progress, but it has costs, too.

Right now, the stock market is in the land-where-there-should-be-sea phase. What we don’t know is when the wave is coming. Maybe there’s time to venture out and see what treasure was hidden beneath the waves -- or maybe not. Prudence would suggest that we go searching for treasure on higher ground.

This is an age-old investor conundrum. How do you balance risk and reward? You have clues, but you can’t be certain of what is coming, or when it will arrive, or what it will look like. You know you need positive returns, but you also need to avoid major losses. The answers are never easy. You take your chances, no matter what you do. Today we’ll see what some of my favorite market wizards see on the horizon.

When Every Lot Is Odd

One sign the water may soon rush out of stocks, indicating tsunami, is the amount of money rushing in. My friend Doug Kass recently shared this staggering chart. It shows that the inflows to stock funds since November exceed the total inflows of the last 12 years. Doug helpfully pointed out that one of the legendary Bob Farrell’s rules is that “individuals buy most of the top and buy the least at the bottom.”

Source: CNBC

Note also, this is just stock funds. It doesn’t include individual trading accounts, and I suspect the amount entering the market via those is equally staggering.

Where is the money coming from? The obvious answer is from the Federal Reserve and government stimulus. But Danielle DiMartino Booth gives us a visual chart to understand just how completely out of historical context the current levels are (from Quill Intelligence):

Yes, some of this is showing up in retail sales, but clearly some of it is showing up in stock purchases (see some reasons why below). We see well over three times the normal tax refund and stimulus number (pushing $700 billion), and I assume this doesn’t even include state unemployment and other indirect stimulus. Also, notice the tiny blip on income tax deposits. The differential is even more stark.

When markets change, as they clearly have in the last two years, you want to ask if something else changed that might explain it. Federal Reserve activity and COVID-19 stimulus payments are obvious factors, but I think something else is contributing. Some history may clarify it.

Way back in ancient times, which some of us can remember, stocks traded in 100-share “round lots.” If the share price was $30, you had to invest $3,000, or $6,000, or some other multiple. You could trade in smaller increments, but brokers frowned on it and some charged higher commissions, which back then were already extremely high compared to today. And odd lot orders often got executed at inferior prices, too.

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Disclaimer:The Mauldin Economics website, Yield Shark, Thoughts from the Frontline, Patrick Cox’s Tech Digest, Outside the Box, Over My Shoulder, World Money Analyst, Street Freak, Just One ...

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Adam Reynolds 3 weeks ago Member's comment

Bullish?