I made a reference on Twitter Friday to how late stage bull runs are always led by frothy, growth names as opposed to consumer cyclical and basic material type names. In late stage bull runs, near 200 point Dow up days will have momentum names like YELP and TSLA leading the charge. There is a psychology to this frame of thinking that has more conservative names left behind while more aggressive names shine.
When bull markets mature, participants become extremely comfortable in the bed that has been made for them. This means that they feel cozy enough to make moves that can create the greatest gains in the shortest amount of time. High-beta investing to the fullest. Invariably, more conservative sectors will get left behind. During strong up days is when the tendency of investors becomes the most evident because that is when greed will surface.
So on Friday we had a strong up day, but the "new school" momentum names didn't shine. In fact, they lagged considerably. Instead, classic market sectors like basic materials, healthcare and consumer staples led on Friday. What does this tell us as astute observers of the market?
1. The market is being led by institutional investors as these sectors are their stomping grounds. When was the last time a guy at a cocktail party was boasting about the prospects of UnitedHealth Group? Institutional investors piling into conservative names is not what creates market tops, instead it creates market sustenance. It's a behavioral continuation pattern, if you will. Leading to the next point.
2. Speculative fervor is nowhere near reaching a culminating, mouth splitting, volcanic inspired blow off point. From volume, to price action, to sector leadership, none of the indications are there.
3. Retail investors are absent in a big way. Retail is always the final piece of the puzzle to an important speculative market top. In 1999/2000 it was retail that was leveraging up and driving stocks like Pets.com, Garden.com and CMGI through the roof. In 2006/2007 it was retail home buyers, with little to no experience in the marketplace, flipping homes without having the credit worthiness or knowledge to determine prudent risk. Retail is the hard cheese to any cushy situation in creation of monetary units. And retail buys buzz worthy names in bunches during strong up days. Retail is still licking the wounds from the double stock and real estate debacle of the past decade.
Watching the market closely during strong up days can reveal a lot about the feelings of investors. The feeling currently continues to be cautiously-optimistic as judged by how participants are treating individual sectors on powerful up days. Cautiously-optimistic market participants do not create long-term market tops in secular bull market.
The beat goes on.
