RUNNING SCARED: THE MOST SPECULATIVE GROUP OF INVESTORS HAVE LEFT THE MARKET
This article also featured on Forbes
Remember the phase 4 stocks? Those companies that the most speculative traders always seem to gravitate to during every intermediate or long term top in the market. I wrote an article about it in February.
In that article I mentioned 3 stocks that were making me concerned about the future of the bull market. Those 3 stocks were JDSU, FNSR and CIEN. It wasn't simply the fact that they were up a lot over the past few months. It was the manner in which they were going up that had me worried. It reeked of sloppy, greed driven buying that always ends in disaster. The market simply doesn't cater towards these types of investors. It might over the very short term or during anomalous market cycles, such as the internet bubble. However, during normal cycles, the market makes it hate for these types very well known by destroying their capital and leaving them with rabbit ears the size of dumbo.
Let's take a look at the three Phase 4 stocks that were mentioned on February 17th as being sloppy and indicating excessive amount of optimism in the financial markets:
(click on charts to enlarge)
FNSR
CIEN
JDSU
That haven't just declined, they have all literally crashed. They all have company specific issues that go beyond this current market decline. What shouldn't be missed, however, is the ferocity with which they are falling. It's an extraction of excessive speculation. The guys who are dumping are the most aggressive investors in the marketplace. Not only are they the most aggressive, they are also typically the ones who are late to the bull market party as described in the Phase 4 article.
If you were a Las Vegas sports book, these are the guys you would want visiting your book on a daily basis. If you sold used cars, these are the customer you would want on your lot. If you traded oranges on a daily basis, when these guys started buying you would want to begin selling your inventory. In other words, these are the market participants you want to be betting against as often as possible. When they are bullish, you want to be bearish. When they are bearish, you want to buy everything in sight.
Guess what they are now? They are as bearish as they have been in sometime based on the ferocity of their selling, which was only matched by the greed with which they bought at the February top.
Anyone wanna take a guess as to who will be caught with their pants down once again? No, not Anthony Weiner. This time it's the Phase 4 weiners.
