Could Retail Bagholders Trigger a Smart Money Rally?

There would be deliciously karmic justice in “dumb money” driving a rally that forced “smart money” to cover their shorts and chase the rally that shouldn’t even be happening.

To be cursed with contrarianism, as soon as a trade is crowded and the consensus is one sided, I start looking for what is considered so unlikely that it is essentially “impossible”. Sorry, I can’t help it.

Crowded trades are 1) long the super cycle of raw materials, and 2) long hurricane force recession for all the compelling reasons we all know: global shortages, geopolitical tensions, soaring interest rates, risk reduction, crazy and stupid levels of debt and speculation, etc.

The consensus holds that “Smart Money” has moved from tech stocks and other overvalued stocks to and . It was a smart move, indeed, and the sooner you moved from stocks to commodities, the smarter the trade.

In this scenario, the stock retail owners are the “bag holders”, those who continue to own the losers to the bottom (been there and done that).

It’s a market truism that bull cycles only end when retail drinks the speculative Kool-Aid of the moment and buys into the last gasp of the rally, allowing “Smart Money” to distribute their stock to the idiots retail, which go down with the ship when the market finally rolls.

2022 followed this scenario closely: as they have been crushed, down 20% to 35%, and Wall Street sentiment is extremely bearish, retail owners have not followed hedge funds in selling stocks.

In the Bagholder/Smart Money script, the market can now descend into a bear market as liquidity dries up and buyers disappear, leaving Bagholders to absorb mounting losses.

Maybe this script is running, maybe not. The opposite has these observations:

1. The institutions have yet to liquidate their positions in Apple (NASDAQ:) and other Big Tech stalwarts. There have been cuts around the edges and that is why these stocks have been pounded by selling. But liquidation? Not yet. These companies are still quasi-monopolies and still immensely profitable.

2. The mood on Wall Street could be extremely bearish (The mood on Wall Street has never been so apocalyptic), but the richest 10% of households who own about 90% of financial assets may not be as close to panic as many seem to think. (Note that the majority of this wealth is held by the top 5% – the segment between 6% and 10% owns a relatively small share of household wealth.)

A. Many of these households are old enough to have experienced the bear market/dot-com crash of 2000-2003 and the global financial meltdown of 2008-09, aka the global financial crisis. They survived, and the conclusion for many is that basic investment strategies are resilient to downturns: avoid highly speculative modes (meme stocks, NFTs, dodgy cryptos, etc.), diversify, and patiently ride out the storm.

B. Overall, these households did not speculate on meme stocks, NFTs, etc. investors than to their total assets.

C. Most of these households have multiple sources of income and stores of wealth. Even major stock declines do not threaten their financial security. Rightly or wrongly, their experience is that even the darkest crises do not last.

D. Their gains are so prodigious that even a 30% drop in every asset – real estate, stocks, bonds, precious metals – still leaves a large portion of their gains untouched. For example, if the house you bought in the late 1990s for $200,000 is now worth over $1 million, a 30% drop to $700,000 still leaves you with a margin of $500,000.

E. Because of their incomes and range of assets, these households can increase their investment positions in ways that the bottom 90% cannot.

3. Commodities are priced at the margin, and a sharp drop in demand combined with a modest increase in supply could result in price declines that anyone who bought into the Commodity Super-Cycle will not. not even think possible, let alone probable. But if supply drops 5% and demand drops 10%, prices crash once speculative hot air deflates the premium for leveraged speculative money.

All of this creates the potential for “Bagholders” to “buy the dip” in stocks aggressively enough that “Smart Money” is forced to cover their short positions and continue the rally. This will be frustrating for “Smart Money:” don’t these fools know we are heading into recession and they should panic sell?

This will be frustrating for another reason: The whole point of distributing to Bagholders is to accrue profits and then wait for Bagholders to sell at the bottom, either in panic or desperation. Then the Smart Money picks up the assets at bargain prices and waits for the burnt-out but still greedy Bagholders to come back.

There would be deliciously karmic justice in “dumb money” driving a rally that forced “smart money” to cover their shorts and chase the rally that shouldn’t even be happening, damn it. Stranger things have happened.

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