All posts by Michael Carr

Insider Trading

The End Is Near

There’s been something missing from the current market.

Throughout history, we haven’t had a bubble until there was a new way of thinking in the markets.

Well, I think the Spirited Funds/ETFMG Whiskey & Spirits ETF (NYSE: WSKY) proves that final piece of the puzzle is in place.

WSKY is an ETF that invests in companies that make booze.

Too much of a niche product for you? Then maybe the ETFMG Video Game Tech ETF (NYSE: GAMR) is for you. This one buys only video game companies.

Exchange-traded funds (ETFs) are baskets of stocks that are bought or sold as a unit.

ETFs offer investors a low-cost way to obtain a diversified portfolio. They are a good thing, but Wall Street always takes good things too far.

The Final Piece of the Bubble

The number of ETFs has grown as Wall Street created indexes. Any index can be turned into a fee-generating ETF. That explains why we now have more indexes than individual stocks.

ETFs offer investors a low-cost way to obtain a diversified portfolio. They are a good thing, but Wall Street always takes good things too far.

(Source: Bloomberg)

The history of Wall Street excesses includes turning subprime mortgages into derivatives that would destroy the financial system we knew in 2008.

In the late 1990s, Wall Street used accounting rules to turn internet startups into billion-dollar companies.

In 1987, portfolio insurance led investors to believe it was impossible to suffer a large loss in stocks.

You’ve probably noticed all these developments ended in disasters. In 1987, the Dow Jones Industrial Average fell more than 22% in one day. In 2000 and 2008, the Dow fell more than 50%.

This desire to take things too far predates Wall Street. The very first bubble in history imploded after futures on tulip bulbs were created in 17th century Holland.

The creation of stocks led to a bubble in 18th century England. Railroad bonds led to several bubbles in the 19th century. Emerging market debt first imploded in the early 20th century.

As stocks rallied this year, valuations became stretched. Irrational valuations are one part of a bubble. We were missing the final piece of the bubble, which was the new way of thinking.

ETFs now provide that piece of the bubble.

The Most Likely Path of the Stock Market

Some investors are buying ETFs because they think stocks only go up. This group is ignoring valuation and buying plain vanilla index funds. Trillions of dollars are now in funds that are designed for long-term investors.

When the next bear market comes, this money will drive downside risks when investors see stock prices go down as well as up.

Billions of dollars are in leveraged ETFs. These funds move two or three times more than their underlying index. They will lose money twice or thrice as fast, as plain vanilla funds are another source of selling pressure.

Volatility funds also hold billions of dollars. These ETFs will move wildly in a bear market as volatility increases, scaring investors out of the funds and creating even more volatility.

All of this means the end is near.

Bubbles always end with a sharp rally up. That’s the most likely path of the stock market through the end of the year.

In a bubble, some investors wonder what to buy. The answer is to buy everything until the bubble pops. It’s time to enjoy what’s likely to be a once-in-a-generation rally.

Regards,

Michael Carr, CMT
Editor, Peak Velocity Trader

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Source: Banyan Hill 

Insider Trading, Uncategorized

When This Chart Changes, All Markets Will Crash

This is a chart of what investors believe inflation will average over the next 10 years. It’s based on what the current interest rates are.

It’s always close to the current rate of inflation. In other words, investors believe inflation will stay about the same.

That’s a surprisingly accurate assumption. Inflation generally does stay within a narrow range.

But when it unexpectedly jumps, like it did in 1968, the stock and bond markets fall.

The Federal Reserve calls this important metric “inflation expectations.” It understands that if expectations are stable, markets are fine.

But if inflation jumps, expectations will jump. The Fed’s goal is to manage expectations.

When inflation jumped in 1968, expectations stayed high for more than 20 years. Stocks suffered four distinct bear markets from the next 15 years. A bear market in this case is a decline of at least 20% in the S&P 500.

If inflation and inflation expectations jump, that will happen again.

Investors will see volatility and declines more often. Consumers will suffer as prices rise at stores. Overall, it will simply be terrible.

And it’s likely to happen within the next few years.

Regards,

Michael Carr, CMT
Editor, Peak Velocity Trader

The 145 Companies Your Stockbroker Will NEVER Tell You About Did you know more than 145 tiny companies have grown to $1 billion-plus valuations since 2012? SpaceX  is up 26,309% in value... Dropbox 31,733%... and Pinterest 487,404%. All of these 145 businesses started out as private companies your broker would have NEVER told you about. But now there’s a great way to find the next private companies poised for hyper-growth. Full Details Here.
Bear, Growth Stocks

October Begins the Best 3 Months of the Year

No matter who you are, there’s at least one thing you like about the last three months of the year.

This is the time of year when holidays cluster. Schools and workplaces close. Families gather to celebrate.

As an investor, I like the fact that stocks deliver their best returns of the year in the last quarter.

In an average year, the Dow Jones Industrial Average and the S&P 500 produce half of their gains in this three-month period. For the Nasdaq Composite Index, the gain in the last three months of the year is about 40% of the annual average return.

Skeptics might question this trend. They may believe there’s no reason for this behavior. But there is.

Swinging for the Fences

Stocks go up when investors add money to their investment accounts. In the fourth quarter, individuals and professionals create demand for stocks.

In an average year, the Dow Jones Industrial Average and the S&P 500 produce half of their gains in this three-month period.

Individuals might fund retirement accounts as the end of the year approaches. They might also fund educational accounts as news stories about tuition costs scare them into action.

Professionals also buy in the fourth quarter. Annual reports to shareholders list all the positions they own. Managers sometimes take part in “window dressing” to make those reports look better.

Window dressing is a powerful motivation.

Bonuses for hedge fund managers depend on fourth-quarter performance. Better performance means a better bonus.

This is often the time of year when managers “swing for the fences” and make aggressive trades in pursuit of a bonus.

Once again, skeptics might not want to believe something like window dressing exists. Academic studies confirm managers sometimes buy stocks just to show off. But studies confirm this doesn’t really help the managers.

One study concluded: “Window dressers also have poor past performance, possess little skill, and incur high portfolio turnover and trade costs, characteristics which, in turn, result in worse future performance.”

A Time to Buy

Now, since window dressing exists, it can benefit highly skilled investors.

Knowing the fourth quarter could deliver large gains, investors should buy aggressive stocks. If you’re not comfortable picking stocks, buy ETFs that track aggressive indexes.

An ETF is an exchange-traded fund. These are investments that trade, like stocks. An ETF usually owns a collection of stocks, like the stocks that make up the S&P 500 Index.

In the fourth quarter, the best ETF to own is the PowerShares QQQ ETF (Nasdaq: QQQ). This ETF tracks the Nasdaq 100 Index and includes companies like Facebook, Amazon, Apple, Netflix and Alphabet (the parent of Google).

Now, the fourth quarter has also included some of the worst market crashes in history. In October 1987, the Dow fell 22.6% in one day. In 2008, the index declined more than 30% at one point.

Including those losses, history says this is a time to buy.

It will be important to manage risk, but it will also be important to accept some risk. Based on history, now is definitely not the time to avoid the stock market.

Regards,

Michael Carr, CMT
Editor, Peak Velocity Trader

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Source: Banyan Hill