There’s an old saying on Wall Street, “Nobody rings a bell at the top of the market.”

This means, of course, that there’s nothing obvious that tells investors when it’s time to get out.

But I wonder… is it that nobody is ringing a bell? Or is it that the bells are ringing but – like children on a playground – investors are having too much fun to hear them?

After all, in hindsight, we can often point to an obvious event that marked at least a short-term top in an asset class or a stock.

For example, think about the wild and crazy action in the cryptocurrency market a few months ago. The price of bitcoin surged from $10,000 per coin in October to over $60,000 by April. Ethereum rallied from $250 to over $4,000. And, the joke-inspired crypto, Dogecoin, ran from less than one penny to trade as high as $0.74.

Today, the entire cryptocurrency market has been just about cut in half. Bitcoin trades just over $39,000. Ethereum changes hands for about $2,300. Dogecoin is $0.20. And folks who chased cryptos higher during that final rush in April and May are stuck wondering “What happened?”

In hindsight, a short-term top was obvious…

Elon Musk’s appearance on Saturday Night Live was the clanging bell telling investors it was time to get out. For weeks, before Mr. Musk’s late-night debut, traders assumed he’d be touting bitcoin and Dogecoin. Buyers rushed to get in position ahead of the “pump.”

That early May episode of SNL received the highest ratings for the show in more than a decade. Mr. Musk was never more popular. And, folks who had never ventured outside of a bank account were throwing their hard-earned money at every crypto-asset imaginable.

Like I said… in hindsight, it was obvious.

It’s just as “obvious” when looking at individual stocks.

Consider the action in Virgin Galactic Holdings (SPCE) over the past several weeks. SPCE bottomed in May near $17 per share. Then the company announced it would be flying its founder, Richard Branson, into space in early July – ahead of Jeff Bezos’ scheduled trip. The stock rallied. And, on the day before Mr. Branson’s flight, SPCE closed near $56 per share.

Today, less than one month later, SPCE trades for about $30 per share. The company’s flight into space was a major “hype” event that signaled at least a short-term top in the stock. It may not have been obvious beforehand. But, looking back on it now, the bell was ringing… and, nobody was listening.

And that brings me to the point of today’s essay… there’s an event happening today that could quite possibly prove to be the clanging bell signaling at least a short-term top of the broad stock market. 

Let me explain…

There has been a lot of speculative activity in the financial markets this year. We’ve seen it in the wild action in cryptocurrencies.

We’ve seen it in the explosive moves in the so-called “meme” stocks (GameStop, AMC, Bed Bath and Beyond, etc.), and we’ve seen it in the general financial message boards such as WallStreetBets, and Reddit.

Much of this speculative activity has come from younger investors, stepping into the market for the first time. As a group, these folks have coordinated their activity to such a degree as to become a powerful force – capable of pushing nearly bankrupt companies hundreds of percent higher in a matter of days.

And many of them, if not most of them, trade through Robinhood.

Robinhood is an online brokerage firm known for enabling commission-free trades through its mobile app. It has experienced remarkable growth over the past year – since the start of the COVID-19 lockdowns last March – as younger folks took their government stimulus checks and ventured into the world of online stock trading.

According to Robinhood’s published reports, the company had 7.2 million accounts in March of 2020. By March of 2021, that number exploded to 18 million. Assets under management grew from $19.2 billion last March to over $80 billion this March.

Robinhood is taking advantage of this growth, and the hype behind the growth, to take itself public in an IPO (Initial Public Offering) which will start trading today.

Clang… clang… clang…

We won’t know until after the fact, of course.

But, I can’t imagine a more poetic “ringing bell” at the top of the market than the IPO of the brokerage firm that enabled novice investors to trade cryptocurrencies, stocks, and stock options at a time when stock valuations were near the highest they’ve ever been.

What I do know is that the stock market usually experiences at least one (and usually two) corrections of 10% or more each year. We haven’t had one of those yet this year. Robinhood’s IPO sure seems like it could be the ringing bell.

Best regards and good trading,

Jeff Clark

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