Eric Fry

As singer-songwriter, Aimee Mann, poetically observes, “The moth [will] beat his wings ’til he burns them black”

…and so will many individual investors.

The dazzling glow of a rallying stock market draws them to the flame of “easy” winnings. But just about the time the winnings become seductively easy, the scent of scorched wings fills the air. Share prices tumble and zillions of investor-moths scorch their savings.

This process repeats as predictably as…well…a moth to a flame…

The telltale signs of a too-hot market are only certain in retrospect. But that doesn’t mean you can’t feel the heat building up ahead of time. The classic signs of an overheated market include both technical and anecdotal phenomena. A technical sign of a topping market would be something like a multi-year low in the VIX Index of implied volatility…or low levels of cash in equity mutual funds. An anecdotal sign would be something like a cab driver telling you his favorite stocks…or a celebrity flaunting his/her stock-trading savvy.

As it happens, some of these signs are evident today, in the here and now. The VIX Index — also known as the “Fear Gauge” — just hit its lowest level since right before the market peak of 2007. Cash levels in mutual funds total little more than 3% of total assets — the lowest level ever recorded! The last two times cash levels dipped below the 4% mark (1999 and 2007), stocks tumbled shortly thereafter.

Cash Holdings at Mutual Funds Near Market Tops

As troubling as these technical signs may be, they lack gravitas without corroborating anecdotal evidence. We all have our favorites, but almost no type of anecdotal evidence terrifies as viscerally and persuasively, as “the celebrity-turned-stock-expert.”

During the waning days of the epic tech-stock bubble of 1999, for example, Barbara Streisand made headlines as a self-proclaimed stock market wizard.

“Barbra Streisand was talking with her good friend Donna Karan on the phone last fall,” Fortune Magazine reported in June of 1999, “and she told Karan she’d made $130,000 on eBay stock in just one month. Karan was duly impressed. As Streisand tells it, ‘She said, “Oh, can you do that for me? I’ll give you a million dollars to invest for me.” And I said, “You’re crazy, why would you do that?” She said, “Well, it sounds like you’re making so much money, so do it for me.” So I said, “I’ll do it if you’re willing to lose it. Are you willing to lose a million dollars? That’s the only way I’m willing to do this.”’

“The result was stunning,” Fortune continued, “After five months of intense trading, Streisand managed to nearly double her friend’s stake, to $1.8 million.”

The stock market tumbled a few months later. As for Streisand’s post-bubble investment acumen, both she and the Internet are eerily silent. The stock-trading exploits of the legendary songbird have all but disappeared from the public record.

Not to worry, sixteen year-old actress, Rachel Fox, has become the celebrity stock-trader du jour! Fox — who was actually a year younger when she posted the video below — describes herself as “one of the only 15-year old stock-trading actresses around,” and reveals that she “makes a lot of money doing it.”

“I make over 64% per year on my investments,” says Fox in the fifth episode of her video series, “Fox on Stocks.” And if you wish to learn how to emulate her investing success, the teenage actress explains, just tune in to Fox on Stocks.

Lesson One (which you can find at minute 1:56 in the video clip below): “Break out your iPhone…” Intrigued? Then check out the entire video for yourself:

Your editor wishes the cheery Miss Fox continuing success, both on the big screen and on the small iPhone screen that’s running her stock market app. But while racking up 64% returns, your editor hopes Miss Fox will remember that stocks sometimes go down. Or, to rephrase that observation in 2013 bull market terms, stocks don’t always always go up. And they especially don’t always always go up when almost everyone has convinced themselves that they do.

Where are stocks going from here? Your editor has no idea. In fact, like a jilted spouse, he is often the last to know. That said, he has observed that stock market lows rarely coincide with multi-year-low VIX readings, all-time low cash levels in mutual funds and “how to” investment advice from Hollywood celebrities.

Eric Fry
for The Daily Reckoning

Eric Fry

Eric J. Fry, Agora Financial's Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling.  Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research, institutional research products dedicated to international investment opportunities and short selling. 

Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry  supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts.  His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.

  • http://www.facebook.com/david.horace.5 David Horace

    At 1:50
    “Once you understand it, it will be so easy.” LMAO.
    Ah, to be 15 yrs old again.

  • annie mishu

    It was a informatory post and it has a significant meaning , thanks for sharing the information. Would love to read your next post too…….

    Share Trading

Recent Articles

Extra!
6 Reasons You’ll Love Being a Late-Stage Investor

Matthew Milner

When investing in a private company, there are two kinds of investors: early-stage and later-stage. And while early-stage investors have more upside potential, they're also exposed to far more risk. Today, Matthew Milner explains how you can be a successful later-stage investor, and still make great gains, with much less risk. Read on...


Video
How to Predict an Economic Collapse

Kate Incontrera

In his recently released book, A Viennese Waltz Down Wall Street, Mark Skousen gives the Austrian School's take on what triggered the 2008 financial crisis - and why you should be wary of the artificial boom that's driving the recovery.


Laissez Faire
Why Heartbleed Will Change the Internet as You Know It

Mike Leahy

The Heartbleed bug is a massive security flaw that could put you and your personal information at risk. And while there are things you can do to limit the damage, you haven't yet seen the ramifications of this security disaster. The Internet in the post-Heartbleed world won't look like anything you've seen before. Mike Leahy explains...


Big Opportunity in the “Baby Bakken” Oil Field

Matt Insley

As the U.S. "shale gale" nears its 10th birthday, it appears the America energy renaissance has outlived its critics. Still, it's natural to wonder whether all the big gains are behind us. Today, Matt Insley reveals the newest shale hotspot, and explains why there's still plenty of opportunity left in the U.S. energy boom. Read on...


Maestro
The Real Reason the US Media Hates Vladimir Putin

Marc Faber

The U.S., Russia, the EU and Ukraine all met in Geneva, where all sides agreed to halt all violence and provocations in Ukraine. But the news media are still taking an antagonistic stance toward Vladimir Putin and Russia. What gives? Today, Marc Faber explains the hypocrisy behind U.S. foreign policy... and the BS the news media are pushing about it...