Dancing on the Bubble’s Grave

Moving at the glacially slow pace that only the government can maintain, our medical overlords at the World Health Organization on Friday officially declared an end to the “global emergency status” for COVID-19.

With the pandemic officially in the history books, I also wasn’t surprised to see retail speculators have thrown in the towel on their favorite bubble stocks.

Yes, the Covid Bubble buying frenzy is now dead and buried, according to the analysts at Goldman Sachs.

By Goldman’s proprietary calculations (and perhaps a healthy dose of common sense) retail investors started to ditch their holdings in early 2022 as the major averages lurched lower.

“The selling intensified in early 2023, and we estimate retail investors have now sold more than twice what they acquired during the pandemic,” a Goldman research note declares.

There you have it – the retail bubble speculator has left the building. Pour one out for the last Wall Street Bets bucketeer as he sells his AMC shares and remaining Dogecoin for a loss and closes his Robinhood trading account. Not only are they selling their meme stocks – these poor souls are also stitching other “stable” investments, even ETFs. The psychology is simple: persistent downside action has soured sentiment throughout even the more stable areas of the market.

It’s the circle of life – at least, for the stock market. Main Street investors pile into the red-hot, popular stocks in an attempt to strike it rich. During the Covid Bubble, this meant chasing meme stocks like GME and AMC, cryptocurrencies, tech-growth, the trendy work-from-home names, and cult stocks like TSLA.

Of course, the short-term returns were outrageous at the height of the bubble in late 2020 and early 2021. But as the months wore on and additional gains in the unprofitable tech basket failed to materialize, speculators began to trickle toward the exit. By the time the broad market

Throwing in the Towel

To be clear, I’m not here to dance on the graves of the struggling bubble buyers. I’m much more interested in using this information in an attempt to gauge sentiment extremes – and figure out when market conditions will improve, along with what investments will outperform as we leave the latest bubble era behind.

First, a quick question:

Have maddening market conditions tempted you to sell your investments and hide under a rock?

I assure you the retail investors aren’t the only folks throwing in the towel. Even so-called professional investors have given into their frustrations and sold out of stocks at some point over the past two years.

While the major averages haven’t fallen to new lows this year, they’ve also failed to break out above key levels that would trigger meaningful technical buying. The result is chop… a lot of chop!

We can clearly see this indecision across a variety of sectors and asset classes.

Crude has traded in a wide range for more than five months, most recently exploding into the mid-$80s in April before abruptly flash-crashing to $65 last week. It has since recovered and is back to trading where it was in… early December. Any recent bets long or short have suffered from severe whipsaws.

Precious metals have also frustrated traders for the past six weeks. Gold futures finally got legs and made a run above $2,000 in early April. But any positive follow-through has been sporadic at best, with prices swinging from the $2,060s back into the $1,980s.

Then there’s the ebb and flow of large-cap stocks so far this year. The S&P kicked off 2023 by powering off its lows with a double-digit January rally, only to give back almost all of this move by the end of February. More recently, it’s flirted with rallies and drops around the 4,100 level (we discussed the importance of a breakout at 4,200 last week).

No matter where you turn, back-and-forth market conditions and the absence of clear-cut breakouts – or breakdowns – is causing some serious frustration amongst traders and investors.

Turning the Corner

Capitulation is a rare and powerful force. There’s an old market adage that says “if the market doesn’t scare you out, it will wear you out.”

We experienced some terrifying drops last year. But there’s nothing scary about this recent market action. Instead, stocks are grinding away, wearing down the resolve of anyone who managed to survive last year’s dismal drop.

If Goldman’s calculations are true and the last retail speculator has flicked off the lights and slammed the door shut, we could begin to enjoy more favorable market conditions – especially if sold-out bulls begin to chase any emerging rallies. Could there be no one left to sell? It’s possible.

I’m especially interested in how the old tech-growth names react over the next several weeks. We’re slowly beginning to see some favorable earnings reactions throughout this beaten-down group – many of which have been building wide bases for a year or more. If breakouts start to stick, fast gains could follow.

These stocks won’t necessarily turn into long-term market leaders. But when it comes to the cleanest set-ups, some follow-through momentum to cap off the January move off the lows isn’t out of the question.

Let me know what you think of this article, or if you have any feedback, suggestions or questions by emailing me here.