In my last post I talked about the power of the greater fool phenomenon. Don't for second think that whatever stocks you own which are preforming well are being purely supported by the good "fundamentals" you researched. There's almost certainly a significant degree of hot money momo flow that is supporting the stock too which will bail at the first hint of weakness. Hot money flow is no different than greater fool buying - people are buying only because the price is rising. So long as there's more buyers than sellers at a particular moment in time, the price of any asset regardless of its fundamentals will go up. This is the notorious principle underlying a pump and dump scheme. Usually you see pump and dumps orchestrated by shady stock promoters or scammers like Wolf of Wallstreet types. But now thanks to a cocktail of social media, smart phone trading apps, free money from the government and unemployed millennials with time on their hands, stocks that a have a low float and/or high short base like GME can get highjacked by retail trading "cults". At first the pros scoffed at them and most still do, but meanwhile the "smart money" is being left if the dust or worse getting raped being short.
The stocks that are targeted doesn't necessarily have to have a high short base (although that would be ideal). So long as the float is small they can highjack the stock. And unlike with a pump and dump where there is usually misinformation/hype that suckers people into a buying a stock, the trading cults can simply target any random stock and highjack it with just the simplest of reasons like "the technicals looks good" or "it's in a hot sector" or "let's squeeze the shit out the shorts" and that's it! GME was an example of the latter. Then you got stocks like BB which have gone up for no apparent reason with the company officially making such announcement.
Surely this must be a sign of euphoria, that the end of this run is near right? Well, not so fast. As I mentioned earlier, the "pros" are still scoffing this rather than behaving recklessly themselves. Although I would say there is indeed some indicators that bullish positioning is elevated, I don't get nearly the same sense of euphoria from them. Mind you, I'm not expecting the pros to engage in similar pump and dump behavior, but what I think will eventually happen is that the pros will capitulate and get fully invested into high flyer type stocks and find whatever rationalization to do so without always looking over their shoulder for the next correction like they are now. You can see evidence of this by the stubbornly elevated VIX which is quick to jump on the fist hint of weakness.
I said this before but it bears repeating. The one major thing missing for the ultimate top to be near is tight monetary and fiscal conditions. Such conditions right now are at the opposite end of the spectrum and provide a fertile environment for this type of speculative activity to take place. While you can get nasty corrections, you simply don't get major bubble peaks until the authorities take away the punch bowl unless the economy unravels on its own accord without the usual trigger of tight money and fiscal. That simply doesn't happen though. You can get periods of a slowdown but not outright contraction.
The question I'm wresting with is do we just keep melting up to the point of maximum all in or is there some sort of a shakeout first? If the authorities just give the slightest of hints that the punch bowl will be taken away sooner than expected or the punch bowl will be less filled than expected, that would probably be a catalyst for a correction. Until then, embrace the action if you can do so intelligently while incrementally raising cash into strength. It's very tempting to try and pick the top but just remember the pitfalls of trying to be the clever contrarian. However when in doubt just stay out. If know you're going to be a weak long it's best you don't get involved for you will get shaken out easily just like today's morning action.
No comments:
Post a Comment