There are a lot of things going on today, so we have many candidates for a catalyst for a big move in the stock market over the rest of this week. The futures are trading significantly lower in pre-market trading, but that doesn’t mean a “big move” has to come to the downside. In fact, we’re not hearing anything particularly specific for this morning’s 1% decline.........Don’t worry, the Street will come up with a reason after the fact....but our view is that a rise in the dollar...the a fall in Bitcoin towards 30,0000...and the crazy move in heavily shorted stocks like GME & AMC...are raising concerns that this overvalued stock market is due for a pull-back.
Again, this does not mean that today’s events will be the beginning of a strong “tradable” pull-back in stocks immediately. Bitcoin could easily bounce strongly and the dollar could easily roll back-over. More importantly, today’s comments from Fed Chairman Powell could calm things down rather quickly...and the earnings announcements out of stocks like AAPL, TSLA, LRCX, etc. could create a strong bounce over the last two days of the week.
Then again, maybe the real reason the futures are down so much today is because investors are beginning to realize that when the #1 issue everybody has been talking about this week has to do with the RIDICULOUS rallies in two stocks that have absolutely HORRIBLE intermediate-term prospects: GME & AMC. In other words, with SO MUCH else going on in the world (pandemic, vaccines, new administration, earnings, China/Taiwan, etc)...the fact that everybody is focused on two companies that are likely to go out of business is probably something that is finally scaring some people.
As we highlighted yesterday, we strongly believe that the REAL issue surrounding GME & AMC is that the huge levels of leverage in the market place today basically INSURES that we’ll see some more very big moves in the market place this year. Right now, it’s the short positions (which are leveraged by definition) that are pushing certain stocks ridiculously higher through “forced buying.”
Going forward, however, the big concern is that the record levels of margin debt on the long side of the market will cause a period of “forced selling” at some point and cause a substantial decline. However, this second situation that could involve some more “forced” action by investors will almost certainly have an effect on A LOT more stocks. The simple reason for this is that the record levels of margin debt in the system shows that A LOT more names are leveraged on the long side right now...than were leveraged on the short side late last week. Therefore, the impact on the broad market will be MUCH higher when the inevitable “forced selling” takes places...compared to when this recent “forced buying” has taken place.
We have very high valuations, very bullish sentiment, crazy action in new IPOs, outrageous levels of option volume for individual investors, record low levels of cash in mutual funds, dozens of new SPACs every week, parabolic moves in things line TSLA and Bitcoin, etc., etc. So there are a lot of reasons to worry about the froth in today’s market. However, the action in stocks like GME and AMC this week should be at the top of everybody’s list when it comes to the issue of froth...because it SHOWS us EXACTLY what can happen when the piper eventually gets paid.
Of course, NONE of this guarantees that a correction of some consequence is going to start now...or any time soon. It could be several months before it begins. In fact, it’s possible that we never get a significant pull-back...and the market just might keep rallying nicely for the foreseeable future. However, the signs are all out there that a significant correction will begin at some time in the coming weeks/months are all over the place. Therefore, the odds that the stock market will indeed roll-over at some point soon are MUCH higher than they are the vast majority of the time. That might mean that the odds are less than 50-50, but since 50-50 (or 25-75) are A LOT higher than they usually are, every investor should be preparing a plan to deal with this very possible outcome IN ADVANCE. Those who don’t prepare a plan...even if they don’t need to implement it...are being irresponsible given all of the signs that are out there.
We don’t mean to sound overly pessimistic. In fact, we’d be very surprised if Chairman Powell does not say something today will help the market bounce. We’re also not calling for a major long-term top in the stock market right now......We’re merely trying to point out that the signs are all staring us in the face...and we all need to heed them...by at least preparing a plan (in advance) for how we will act (and react) if/when it become evident that a serious decline has indeed begun.
With this in mind, we believe that leveraged investors should lighten up on their leverage...and continue to believe that all investors should to raise some cash over the coming days and weeks.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.