QVML - More Americans Than Ever Own Stocks Now At 58% - Sell

2023-12-21 02:45:55 ET

Summary

• Majority of Americans now hold stocks, indicating significant growth in market participation.
• New investors may make common mistakes such as buying low-priced shares and holding onto losing stocks.
• The market is overbought, leading to a sell-off, and experienced traders are taking advantage of the situation.

According to the latest Fed survey from 2022, a majority ( 58% ) of Americans hold stocks. That is good news of course

This is according to the Federal Reserve Survey of Consumer Finance, the last survey in 2019 showed 53%, so this is a major growth spurt. Is that really a good reason to sell? No, in fact, the more people participating in stocks the more powerful and liquid the market becomes. It is a great way to open the topic of what new participants will be going through, and maybe offer them hope. It does mean, is that there are a lot of people that are new to the markets, and new to investing and trading. They will be making all the same mistakes we all did when we first started, and some of us still do. Such as:

• Being attracted to low-priced shares, thinking they are a "bargain". Most often the cheap shares are cheap for a reason
• Thinking that they must buy 100 shares at a time, otherwise they are doing it wrong.
• Automatically buying more of these "cheap" shares when a stock falls, because they need to save that stock, or they are getting an even better bargain. This could go on until unfortunately some real damage is done to someone's savings.
• Once a stock is in the red, they will sit with that stock for months or longer, instead of facing up to the fact that the market was giving them a message they refused to receive. Price is truth. And the truth is that stock was getting a lower value, not becoming more of a bargain
• Even worse, and this is why the title of this article says "sell", is that those who are new to the market usually come in at the top. They buy shares from more savvy operators selling their shares at the highest price, and then when the market sells off like today they dump those expensive shares for much cheaper.
• Take the approach that there is risk, don't just buy a stock thinking about how rich it will make you. Understand that it can also make you that much poorer.
• Don't start trading right away, be an investor. Look for dividend-paying stocks that you know are quality.
• Don't just follow tips, understand what you are buying.
• No one should be smirking because if you've been at this for several years, you did this as well. Some of you may still be doing this, so let's be kind.

It is my most fervent wish that some of the newer stock enthusiasts are reading this article. There are several learnings that you can glean from what happened today. First, please disregard any fundamental explanation offered for today's selling, it wasn't about the Houthis lobbing missiles in the Red Sea. There is a very strong technical explanation; the market simply was overbought, plain and simple. Now what I mean by technical is that the stock market follows certain mechanisms, they have nothing to do with stock fundamentals. As you get more experienced you will learn that there is a whole system of understanding market moves that has nothing to do with stock themselves. What I mean by "overbought" is that there were just too many traders piled into stocks. Very simply for a moment at around 2 pm Eastern, the last incremental buyer was satisfied and all of a sudden stocks started falling. Some would call that a "buyers strike". In an instant, everyone crowded into the exits and those who bought shares 3 weeks ago were less particular as to price because they were up 20%, and taking 10% for those shares was a lot better than the prospects of that position turning into a loss. Also, automated algorithmic trading kicked in immediately and started shorting stocks. A great example would be Nvidia ( NVDA ) it hit 499.99 and the all-time high was 505. NVDA Closed at 481, it's possible that if this sell-off started earlier in the day NVDA might have fallen further. I am not telling you this to scare you away from one of the best stocks right now. If you are prepared to watch the market you can identify when the market is topping out. All it takes is to learn how to read charts. Here is a chart of the S&P 500 ETF ( SPY ) that I shared a few days ago. The SPY is a proxy for the main index by which stock operators watch the market. Please note the date on this chart is December 18, I drew this chart 2 days ago.

Charting is merely a pictogram of the collective opinion of the price of something of value, in this case, it is an ETF. The "measured move" is a way to measure how high a stock can recover from a sell-off. From that horizontal line to the bottom was 30 points (300 S&P points from the bottom at the end of October, adding that to the position of where that line was at 440 (4400 S&P points) gave me 470, which matches very well to today's top of 4700. On the right-hand side of the chart, I outline the sharp thrust of the rally which was just too sharp. I told everyone that the market is overbought. We use Cash Management Discipline, and that means to start generating cash in our trading accounts. Right now the goal is to have a cash reserve of 30% by year-end. Also part of CMD is to change how we buy and how we sell. We buy a few shares at a time. That means if a stock that we like falls 5% it truly is an opportunity, and we buy another few shares. If you do this every day or two and pretty some you have a nice collection. However, you must understand why you are buying a stock, and why it's a good stock.

So knowing that the market is oversold is great, what to do about it?

Let's go back to what transpired this week, so having determined that the market was overbought, and setting the 30$ cash goal, I started making single-stock shorts via Put options, the first was NVDA Put, I started with 1 (CMD rules work in options too)

It's hard to see but you can click on it. I entered 20.30 and got it at 19.90 on the open. At this point, NVDA was at about 497. I have rules on trading options and one is if you get an instant return above 40% you should just say thank you and close out that position. You'll have to take my word for it but I also got Puts on Disney ( DIS ) and Tesla ( TSLA ). I sold NVDA, and DIS, but am still holding TSLA. I also had that 30% cash I was telling you about. I got long Affirm ( AFRM ) which was trading at 51, and fell to 46 so I got long calls at the 47.5 Strike. I also got long Calls on Alphabet ( GOOGL ) at the 140 strike. I still have cash left over just in case stock continues to fall. In my experience, a sell-off like this is only a harbinger of what is going to come, and the dip buyers will come crowding into the best names. You might know that I have been predicting a real correction in the 1st Quarter. I wrote about it in the beginning of this month - Market Should Retreat 10 to 15 Percent By Mid-March Probably Sooner . For the coming sell-off to happen that sharply, there will have to be a fundamental reason attached to it. I would guess that we will see an actual slowing in employment. Perhaps earning reports from Q4 will come in less than expected and that set us up for any other bad economic news. What I do know, is that today's little stutter-step is an omen. We need to keep an eye on stock prices getting ahead of themselves. Here is another CMD tip, keep your trading account separate from your investing account. When you invest in something stick with it, and don't be afraid to pay up for quality. I bought Eli Lilly ( LLY ) in February '23 for about 320 a share. They ran up over 600, and are now trading at 570. I am not selling a share now, and I didn't think twice about paying 320 for them either. There are plenty of solid companies that offer a dividend to invest in. Leave the trading aside until you have gotten comfortable with how the stock market works.

A note to investors

Many people will start moving cash into their 401K, or their IRA at the start of the new year. I believe that we very likely will see the top of the market in Q1 with that high going unbroken until the end of 2024. I would suggest allocating that cash very slowly and perhaps waiting until the selling begins to start investing. Do that on the off-chance that I might be right about a bit of a correction next quarter. We are building up a head of steam and this wouldn't be the first time that we see some mighty selling by the "Ides of March".

OK, good luck everyone. Just remember, there is nothing wrong with holding cash when you are seeing stock going up for days on end. Hold that cash, wait for the selling, then pick up some bargains!

For further details see: