Meltdown Is A Crowded Trade

Somehow Wall Street convinced the dumb money that a 16 day bear market corrected an 11 year bull market. How did they do that?

We just learned that more money flowed into stocks in the past five months since the election than in the twelve YEARS prior:

Which perfectly fits the definition of a broadening top:

"In the broadening top formation five minor reversals are followed by a substantial decline"

It is a common saying that smart money is out of market in such formation and market is out of control. In its formation, most of the selling is completed in the early stage by big players and the participation is from general public in the later stage"

This past year was the Dow's biggest annual gain in history to an all time high. As we note from the chart above, the other two massive gains in the past two decades came at the beginning of the cycle. Which is why today's herd is convinced this is a whole new cycle. After over a decade, they finally came off the sidelines and bid up their own stonks to ludicrous valuations and now they assume there is another fool to follow. 

The last time the Dow gained a similar amount year over year was March 2009 through April 2010. Then the market exploded in early May in the infamous "Flash Crash". Of course, this time around the gain is larger and the risks are 10x in magnitude. 

Picture their reaction when what they thought was the beginning of a new bull market turns out to be a retest of last year's low. And when that fails, it turns out to be a retest of the 2009 low.

Epic shock and awe followed by epic rage.

Still, the vast majority of pundits remain sanguine. Wharton Finance professor Jeremy Siegel sees 30% upside from these levels.

He like so many others is convinced that printed money is the secret to effortless wealth:

"I think interest rates and inflation are going to rise well above what the Fed has projected. We’re going to have a strong inflationary year. I think 4% to 5%”

Got that? The Fed will lose further control over interest rates but stonks will go up regardless. High quality financial insight from a renowned Ivy League Ponzi schemer. 

What I showed on Twitter is that the weekly AAII retail bull - bear indicator is at the highest level since 2018, confirming the Ameritrade IMX positioning indicator:

Bears keep getting stampeded by dumb money, so what we see via the NAAIM survey is that deja vu of last year, active managers have decided if you can't beat 'em, join 'em. This week they took their risk exposure off of crash levels back up to last year's pre-implosion level of fat and happy:

Here we see the current state of large cap Momentum stocks. The largest holdings are: Tesla, Microsoft, Apple, Nvidia, Amazon, Paypal, Adobe, and Google. The Full Monty.

It has now retraced slightly more than .618 fibo of the wave 1 decline. Also we see in the lower pane that new Nasdaq highs have been diverging massively since the top in February. This tells us there are very few stocks holding this gong show up now. Which means that the impending decline will be very fast and catch many people by surprise.

Unlike last year, the divergence between the average Nasdaq stock and the major averages (S&P, Dow, NDX) has grown acute and unnoticed:

My advice to bulls is to enjoy the ride. Because it's a one way trip.