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Everything Is High

Written by Jason Williams
Posted February 5, 2021

Literally everything is high these days.

Housing prices are high. Stock market valuations are high. Unemployment is high. The national debt is really high. And I’m starting to think investors might be a little high too.

That’s because the warning flags that a correction is coming are getting higher every day. And yet investors are still pumping money into the markets…

Confident or Arrogant?

Bank of America has an investor confidence metric that it tracks. And right now it's up as high as it’s been since the dot-com bubble.

Investors are extremely confident that stocks can only go up. And that’s usually the time that returns start to falter — when everyone thinks they couldn’t possibly slow down.

The Bank of America indicator has a pretty solid track record of predicting market direction for the coming year. When it’s higher than usual, returns tend to underperform.

Now, that’s not to say the market never gains after this indicator hits a peak. It just underperforms the previous year. But after a year in which markets were up double digits across the board, that’s probably something we all expect anyway.

So maybe investors aren't getting arrogant just yet and they're just overly confident.

And just maybe, we can ignore that red flag for now. Until we start to see others run high up the pole, that is…

Insiders Head for the Doors

The insiders at a company tend to be more in the know about what’s going on behind conference room doors. And they tend to have a better idea of where their stock is going to go than the average investor.

So when they’re selling in droves, we might want to pay attention. Because that throws up another red flag.

And even before the GameStop short squeeze dinged markets, insider sales were hitting astronomical levels compared with insider buys. And the stocks experiencing the most selling paint a picture of what the insiders see coming down the road.

They’re selling out of big tech stocks like Ciena, Facebook, Zoom, and Dell.

That’s a sign that the insiders see their shares priced to perfection and that anything below that in execution will tank the price.

And while most insider sales are preplanned — that is, on a schedule — pre-arranged sales are up nearly 40% on the tech-heavy Nasdaq compared with a year ago.

They’re also selling off the reopening plays like Disney, Carnival, and Shake Shack just as the internet blows up about how those are the stocks to buy as vaccines roll out.

That could be a sign that the crowd has arrived and the reopening trade has seen its run come to an end too.

Insiders are selling out of cyclical stocks like Morgan Stanley, U.S. Concrete, CarMax, and Masco as well, suggesting that those got ahead of themselves too and need to cool off while the economic cycle catches up to the stock valuations.

They’re also selling out of high-flying biotech names because they know rates will eventually rise. And when that happens, the present value of their future earnings will fall (because you discount based on interest rates).

When rates go up, the present value of money in the future falls. Right now these stocks are priced for near zero percent interest rates. That's like dividing any number by zero — the result is completely meaningless. And rates never stay anywhere "forever."

Investing or Gambling

Finally, you’ve got the speculators out there. GameStop has monopolized the headlines for weeks now. And that’s 100% speculation at this point.

As you know from my article on Wednesday, GameStop does have some fundamental value. It does have potential to be a turnaround story. But it does not have the potential to justify a $400+ price target.

But fundamentals don’t matter when you’re gambling in the stock market.

You don’t check the fundamentals of the roulette wheel before you pick a number. Why check the fundamentals of a company before you pick a symbol?

But the thing is, when you start to see so much speculation, that’s a red flag too. Sure, there’s always some gambling going on in the market, but when it gets to the point where politicians, celebrities, and the mainstream media are all opining on it, you know it’s reaching a peak.

Low interest rates and a lot of free money getting pumped into the system through various avenues have led to higher risk tolerance on Main Street.

And when speculation is that widespread, it ties back into the Bank of America indicator I mentioned earlier. Investors are overconfident.

So maybe we do need to pay attention to that first red flag after all.

Bottom Line

Every week, more and more red flags keep popping up. But everything still goes higher. I don’t know which combination of sell signals is going to trigger the correction.

But I do know that if they keep adding up, eventually they’re going to tip the scales. And when that correction happens, it will happen faster than most of you can say “Sell it all.”

So now is a good time to check out your strategy and see if you’ve been investing or just gambling. And it’s a good time to rebalance your portfolio.

Take some profits off stocks that are priced for perfection. Give a little love to ones that haven’t rallied like the rest. And keep a pile of cash on hand so that you can be greedy when everyone else is panicking.

But don’t get out of the market entirely. The biggest gains almost always come right before the bubble bursts. And you don’t want to cut yourself out of those.

To your wealth,

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Jason Williams

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After graduating Cum Laude in finance and economics, Jason designed and analyzed complex projects for the U.S. Army. He made the jump to the private sector as an investment banking analyst at Morgan Stanley, where he eventually led his own team responsible for billions of dollars in daily trading. Jason left Wall Street to found his own investment office and now shares the strategies he used and the network he built with you. Jason is the founder of Main Street Ventures, a pre-IPO investment newsletter, and co-authors The Wealth Advisory income stock newsletter. He also contributes regularly to Wealth Daily. To learn more about Jason, click here.

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