“some things that should not have been forgotten were lost. History became legend. Legend became myth.”
― J.R.R. Tolkien
It’s the nature of markets that the dumb money buys at the top and sells at the bottom.
When I was pounding the table and recommending stocks in 2009, few people wanted to hear it. When I said buy oceanfront condos in 2011, it was crickets. When oil was trading near $100 a few years ago and I said it was going to $33, I was laughed at. When it went negative and I said buy – people were too scared.
To make money in the market you have to be at peace with the idea that the market is going to crash; it always does. Many people believe that bull markets last around 16 years because that’s how long it takes for history to become legend, for a generation to forget the gut-wrenching pain of a true bear market.
To this day my wife distrusts equities because her mother had the misfortune of inheriting $200,000 in 1998 and did what everyone told her to do – she bought internet stocks like Cisco, AOL, and Yahoo.com. A few years later she had less than $20,000 in her account.
That’s the type of pain a market needs in order to clear the table and set a base for the next bull market. It is where the smart money makes its money.
And yet people have forgotten what it is like to have an expensive mortgage and a refi loan only to lose their job. Knowing that your home won’t sell for what you paid for it is a clarifying idea. Homeowners mailing in their keys was a common story in 2010 and it might be again in 2025.
Most Americans are tapped out – they just don’t know it yet.
A new report from HubWallets warns that high debt levels, high interest rates, and economic uncertainty could create “significant headwinds” for American households. And at worst, they can be “catastrophic.”
Credit card debt nationally has risen to $1.27 trillion, that’s up 7% compared to a year ago and further into record territory. The average credit card debt per household is over $10,000.
The average credit card interest rate is around 23%.
Debt Up to Here
The Fed’s latest report on household debt, which includes mortgages and student loans, showed a new all-time high of $17.69 trillion.
I’m not saying we are going to crash tomorrow. Today’s market action suggests we are in the middle of a blowoff top which could last longer than one thinks.
I am saying we are much closer to a top than a bottom. The current bull market, if you go by the long-term uptrend, hasn’t been broken since 2009. 2022 was a correction within the broader uptrend.
These days random people are offering up unbidden investment advice. A guy I sailed with was telling me the benefits of buying and holding S&P500 ETFs. That sort of thing happens at tops. At the bottom of the market, they talk about inane subjects like sports or the weather because it is too painful to hear about stocks.
Blow-Off Tops
The end of bull markets are marked by a “this time is different” feeling of euphoria. People who have never invested buy speculative stocks they don’t understand at valuations they can’t explain. This very clearly happened in 1999 at the height of the dot-com mania. It happened again in real estate a decade ago. It is happening again right now.
Nvidia is twice as expensive in terms of Enterprise Value-to-GDP (EV/GDPO) as Cisco was in its heyday!
If you are long Nvidia you better hope the CEO doesn’t die or the CFO retires.
That said, fully one-third of the gains in bull markets happen at the very end in blow-off tops. Most of the gains come from high-risk sectors such as penny stocks, tech, and biotech. In the last half of 1999, Yahoo tripled in price.
You’ll notice that small-cap stocks are back in fashion.
It’s been 15 years since the great recession bottom, which means a whole new generation of suckers has been born to replace those who were burnt last time. They will be the ones calling you an idiot for selling six months too soon. Don’t listen to them.
How to Play It
The way to play it is to divide your money into two segments. The first segment could be as little as 10%. You buy momentum stocks with this one — that means you chase the market darlings and ignore any type of valuation metrics.
Young, arrogant, true believers always perform best in blow-off tops. In 2009, stocks like Yahoo, AOL, and Cisco went up 10% a day for weeks. To make money this way, you need to employ a hard 20% trailing stop-loss.
The second portion of your money you put into a money market fund. These are paying around 5%. If your broker pays 4.7% don’t sweat it.
Once the market drops and people start getting hit by margin calls all asset classes will go down – including gold, oil, and real estate. They will go down fast. The only place to be safe in the first phase of a market crash is in cash.
In the second phase, when you can buy gold stocks for less than the cash they have in the bank you go big. In 2009 many of these stocks made between 500 and 3000% gains.
And if I’m wrong and the market keeps on ripping higher then you still make 5%. If I’m right you get to know your money is not only safe, but you are poised to make a fortune by buying all assets dirt cheap.
All the best,
Christian DeHaemer
Outsiderclub.com
https://www.outsiderclub.com/7-ominous-market-charts/
https://www.outsiderclub.com/inverted-yield-curve-hits-record/
