The Rally Is Running on FOMO

So… now what?

Investors got the Fed Funds rate cut they were looking for on Wednesday. They also got a tepid nod for two more cuts this year.

The initial reaction was muted. Stocks climbed a bit at first. Then they dropped a bit. By the end of Wednesday’s session, the major market indexes closed just about where they were prior to the rate-cut news.

We didn’t get a “sell on the news” event. And, we also didn’t get a “blow the shorts out” rally – until yesterday.

Stocks gapped higher yesterday. The indexes surged to new highs.

Despite record-high valuations, despite low cash balances in institutional accounts, and despite the calendar being right in the middle of a seasonally bearish period, investors chased the momentum higher.

As Appaloosa Management’s famed leader, David Tepper, explained on CNBC yesterday morning, you can’t afford to not be in this move. He further explained that, while he wasn’t “thrilled” about buying stocks in this environment, the risk of underperforming was too great.

Mr. Tepper cited the action in the NASDAQ in 1999 and early 2000 as a similar period in which investors could not afford to miss.

While I try not to make a habit of arguing with billionaires about financial concerns, my immediate response was, “Huh?”

Most folks who participated in the dot-com melt-up in 1999 and early 2000 also participated in the melt-down that followed. Folks who bought stocks on the basis of “page views” and the promise of earnings far into the future – because they couldn’t afford not to participate – struggled to find the “sell” button when stocks first started to rollover.

That’s not a big problem for someone worth north of $20 billion. For the average “mom and pop” investor, though, it proved to be a far better decision to sell stocks into the dot-com melt-up phase rather than trying to squeeze out the maximum profit possible.

So, as the calendar rolls over to the seasonally weakest few weeks of the year, stocks are trading at the highest fundamental valuations ever. Institutional investors’ cash balances are at their lowest levels ever. U.S. household allocations to stocks are the highest ever. Margin balances at brokerage firms are higher than ever. And, the best reason a multi-billionaire hedge fund manager can come up with to be fully invested is he can’t risk underperforming.

I suspect most folks are better off hitting the “sell” button right now. Raising cash and selling stocks into strength today, might mean you’re risking underperformance in the short term. But, it will come in handy when the inevitable correction occurs, and you can buy stocks cheaper in the weeks ahead.

Best regards and good trading,

Jeff Clark
Editor, Market Minute