A Bit Of An Overhang

One thing that may bring a bit of an overhang to stocks for some time is that it seems retail investors became the most enthusiastic about buying stocks late last year and back in January.  This from the Wall Street Journal about a month ago:

"After sitting out most of the nearly nine-year bull market, individual investors are finally pouring in.  Discount brokerages TD Ameritrade Holdings Corp., E*Trade Financial Corp.  Charles Schwab Corp. reported surges in client activity at the end of 2017 that have accelerated in January. The firms attributed much of the activity to retail, or individual, investors who are opening brokerage accounts for the first time, some of them lured by the boom in cryptocurrency and cannabis investments.
“There’s pent-up activity and some element of the fear of missing out,” said Devin Ryan, a brokerage analyst and managing director at JMP Securities LLC, especially among younger investors as the stock market continues to hit highs."

If this ends up being a longer-term top in stocks then it will be another classic example of individual investors getting into stocks at exactly the wrong time, much as like back in late 1999-early 2000 and again in 2007.  One thing missing except in the cryptocurrencies and marijuana stocks is any sort of obvious speculative excess in the public domain.  There so far aren't any crazy daytrader commercials on TV and my email inbox isn't stuffed full of "can't miss" investment systems promising to make me a fortune.  This makes me think that while a certain segment of the population may have bought in as stocks were making some sort of top, the rest of the world may not have been quite as headstrong.  Older investors still have wounds that sting from the last bear market.

What this does mean though is that there is a bit of an overhang to stocks.  Many buyers from earlier in the year are holding losing positions and those positions will likely need to be worked through before stocks can broadly advance again.  I mean that an investor holding a position with say a 5% loss right now is more interested in getting back to break even than whether or not he or she will make money.  Often times that losing position gets sold the closer it gets to neutral.  That means there's a natural barrier of sellers at higher prices looking to be made whole who could be sellers if stocks at some point get back to the levels where these positions were purchased.  This creates a barrier or resistance at higher prices that often needs time for it to be corrected. 

Something to watch for as stocks try to advance.

Back next week.  I will be traveling much of the week and will only be posting either Monday or Tuesday.

The publicly traded brokerage firms named above are underlying positions in certain ETFs held by my firm in both client and personal accounts.