Nobody rings a bell at the top of the stock market. At least, that’s the well-known saying on Wall Street.
It means nobody is going to tell you that it’s time to get out. And, without that notification, you’ll likely stay invested and suffer whatever consequences occur in the future.
I’ve never really bought into that theory. After all, the market provides any number of warning signs before it’s about to turn lower. That’s the whole point of technical analysis.
But, maybe most folks don’t pay attention to the VIX, negative divergence, investor sentiment, margin debt levels, or any number of other indicators. Most folks are looking for a more distinctive sign that it’s time to get out. Most folks want to hear a bell ring.
But, are most folks really willing to listen?
I ask because Quasimodo was clanging everything he could get his hands on last week. But, it didn’t seem to matter…
Let’s start with the insanity behind special purpose acquisition companies, or SPACs. These entities were formed to help create a liquid environment for small companies in need of capital investment. They’ve morphed into incredibly speculative vehicles that chase the hottest investment trend and pay top dollar for anything associated with the concept.
For example, in late November 2020, the Arclight Clean Transition SPAC (ACTC) went public at $10 per share. The stated purpose was to… heck… I don’t know… But, Yahoo Finance defines it as “focusing on effecting a merger, or similar business combination, with one or more businesses.”
The stock was $11 per share when it started January. It finished last week near $26.
I have to ask… What happened?
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Well, one of the principal founders, Chamath Palihapitiya, tweeted a message that he had just started this SPAC. And, since Mr. Palihapitiya has been touted as this generation’s Warren Buffett, folks rushed to buy into the stock.
So, what was worth $11 per share two weeks ago was worth about $26 per share on Friday. Nothing changed… The fund didn’t announce any major investments. The stock gained 125% based on the value of a tweet.
Ding, Dong, Ding, Dong, Ding.
Or, how about this…
Cathy Wood, who Bloomberg News named the best stock picker of 2020, announced she was starting a new fund to invest in space exploration stocks. That news alone was enough to create huge rallies in that space. Virgin Galactic (SPCE), for example, gained more than 20% on this news.
Ding, Dong, Ding, Dong, Ding.
Or, how about the possibility of a short squeeze sending a stock higher by hundreds of percent? That’s what happened with GameStop (GME).
GME is a heavily debt-ladened retail seller of video games and accessories. Most of what the company sells can be purchased online. So, their retail stores are obsolete and unnecessary. And, given the heavy debt load, the company seems destined towards bankruptcy.
But, the stock market never makes the obvious outcome easy. And, GME – which started January at about $18 per share – traded on Friday above $76.
The gain was fueled by a stock market research report that listed the stocks most likely vulnerable to a short squeeze. GME topped the list of the most shorted stocks. And, voila.
But, nothing changed with the company. Growth rates aren’t expanding. Earnings aren’t improving.
All that happened was traders jumped into positions in order to squeeze the short sellers to cover their bets. There’s nothing long-term bullish about that. It’s a temporary, and manipulated, rise in the stock price.
Ding, Dong, Ding, Dong, Ding.
Some folks will argue that it’s different this time. The speculative activity in the financial markets is explained away because of low-interest rates, expectations for a rapidly growing economy, or the government dropping money from helicopters.
But, it’s not different. This sort of crazy, speculative activity happens almost always at the END of a major bull market, not at the beginning of one.
It’s just about as close as we’ll get to someone ringing a bell.
Best regards and good trading,
Jeff Clark
P.S. We don’t always get the ringing of a bell to alert us on speculations. But, as I mentioned, it doesn’t really matter. As long as you can understand a bit of technical analysis, you’ll spot the many warning signs in the stock market before it’s about to turn lower.
And, that’s exactly why I created this method that I’ve been using for three decades. Allowing me to profit consistently off of identifying the trends in just three stocks, it’s a simple strategy that lead me to retire by the age of 42. Click here to learn more.
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