The 'Smart Money' Has an Out
Headlines full of uncertainty... Tariff threats are back... More from Washington... Bitcoin tumbles... Mom-and-pop investors are buying... Insiders are selling... It looks like 'Stage Three'... Temper your expectations...
Tariff threats are back...
President Donald Trump is not letting Canada and Mexico off the hook. You may recall that on February 1, he signed an executive order implementing a 25% tariff on all imports from Canada and Mexico.
But only two days later, Trump announced that he was delaying the tariffs by a month after meetings with Mexican President Claudia Sheinbaum and Canadian Prime Minister Justin Trudeau and agreements to help with U.S. border security.
Well, now that deadline is set to end next week. And, in a press conference at the White House yesterday, Trump said that those tariffs on Canadian and Mexican imports will go into effect "on time, on schedule" on March 4.
We've written a lot about Trump and his tariff announcements in Digests since the election. These stories are a perfect example of the "headline risk" our colleague and Chaikin Analytics founder Marc Chaikin has spoken about, too.
Tariff headlines can and have recently spooked investors, with fears of higher inflation or a hit to trade and economic growth. But we've already seen Trump delay tariffs once after gaining concessions from Mexico and Canada.
With the deadline approaching on March 4, we're willing to bet that all three countries are going to try and find a way to delay tariffs again.
The market is holding its breath in the meantime...
The fate of tariffs is just one of several uncertainties investors are grappling with today.
A widely followed gauge of U.S. consumer confidence from the Conference Board came in below Wall Street expectations today. It posted its largest monthly drop since August 2021 as growth expectations dwindled and inflation concerns rose.
Meanwhile, overshadowed by all the news coming from the White House and "DOGE" these days, Republicans in Congress are trying to square legislation that would cut taxes but also spending... And another "debt ceiling" deadline (meaning the possibility for a government shutdown) is approaching next month.
Declines in tech shares weighed on both the U.S. benchmark S&P 500 Index and Nasdaq Composite Index, which extended their recent losing streaks. That was ahead of tomorrow's earnings report from AI bellwether Nvidia (NVDA), which could be a catalyst for future market sentiment.
Bitcoin falls into 'bear market' territory...
The air has come out of bitcoin's balloon in recent weeks. Since hitting a fresh intraday high of more than $109,000 on January 20, the world's largest cryptocurrency has tumbled more than 20% to around $87,000 today.
That means bitcoin has entered a technical bear market – measured as a 20% decline from all-time highs. We might argue that the formal threshold for a bear market for bitcoin should be bigger, as bitcoin is infamous for its wild price swings – both to the upside and the downside. It dropped by more than 20% multiple times before ultimate bull market peaks in 2017 and 2021. Today, the cryptocurrency is still up more than 67% over the past 12 months.
The sell-off is not insignificant, though. And bitcoin proxy MicroStrategy (MSTR) faced an even bigger hit, with shares down more than 45% from their recent high on November 20. And shares are down 38% from when we warned investors about the stock in the December 11 Digest.
Put simply, the postelection euphoria of a "pro-crypto" President Trump is starting to fade away. While he enacted executive orders in his first days in charge on digital assets, the results haven't shown up yet in any meaningful way.
Investors sitting on large gains from before the election have appeared happy to take profits while we wait to see what happens with America's crypto regulations.
We've seen a similar trend in the stock market lately as well...
Individual mom-and-pop investors, known as retail investors, haven't been this active in years. And as longtime readers know, here at Stansberry Research, we treat retail investors' behavior and sentiment as a contrarian indicator.
As the Stansberry's Investment Advisory team explains in a description of their proprietary monthly money flow indicator...
When the public is eager to buy stocks ("inflows"), prices are quickly bid higher. When the public is selling stocks ("outflows"), prices usually become very cheap. That's why we're most interested in buying stocks when the public isn't.
Right now, the public is all-in on stocks. Data from the investment bank JPMorgan Chase (JPM) showed that retail investors now make up 25% of total stock market activity...
That's the highest level since the meme-stock frenzy of December 2020 to February 2021. Remember, back then we saw retail trading send shares of GameStop (GME) more than 1,700% higher in less than a month. And the flood of cash from individual investors saved movie-theater chain AMC Entertainment (AMC) from bankruptcy.
This time around, retail investors are focused more on big tech stocks... Remember when DeepSeek announced it had created a less-expensive AI model last month? Many AI stocks fell, but retail stepped in to buy the dip with its largest weekly inflow ever.
As our colleague Jeff Havenstein wrote in the February 19 issue of the free Health & Wealth Bulletin e-letter...
During the last week of January, there were two days when inflows from retail investors surpassed $2 billion. We've only seen this happen nine times in the past three years. Then, on February 3, retail investors put $3 billion into stocks in a single day. And the following day, cash inflows exceeded $2 billion within the first hour and a half of trading – a record going back to 2015, per JPMorgan Chase.
So the general public is seeing buying opportunities, even with stocks so close to all-time highs.
A second warning sign...
Those inflows aren't the only sign of froth in the markets. JPMorgan's gauge of retail investors' sentiment has surged higher in recent weeks. Just take a look at this chart Jeff shared of "through the roof" enthusiasm...
This chart has captured several market tops over the past few years. Jumps in retail sentiment in the early months of 2020 and 2022 both marked the start of bear markets. So the most recent reading – which marks the highest level in more than five years – is flashing another warning sign.
The party isn't over yet...
Now, just because folks are all-in on stocks doesn't mean a crash is imminent.
Look at the previous spike in retail-investor sentiment on the chart above. In January 2024, enthusiasm grew to reach the highest level since early 2022. Since then, the S&P 500 has risen 25%, with the largest drawdown being 8%.
And some retail favorites have done even better... AI software company Palantir Technologies (PLTR) was up more than 60% this year through February 18. Even with a sharp sell-off over the past few days, its 21% year-to-date return dwarfs the broader market's 2% gain.
More from Jeff...
Stocks can shoot much higher and for much longer than you'd expect during euphoric market runs like this. Higher stock prices lead to more money being moved into the market, which leads to even higher stock prices. This vicious cycle can happen quickly and last a while, so it can be difficult to tell when everything is about to crumble.
Since that January 2024 spike, this is exactly what we've seen. Sentiment cooled off throughout this rally but has spiked higher again. This is a behavior worth noting, especially with stocks at already "expensive" valuations after two straight years of 20%-plus returns for the benchmark S&P 500.
It looks like 'Stage Three'...
The true blow-off top comes when everyone is obsessed with stocks. Investing legend Peter Lynch calls this "Stage Four" of the market cycle. As he wrote in his book One Up on Wall Street...
Even the dentist has three or four tips, and in the next few days I look up his recommendations in the newspaper and they've all gone up. When the neighbors tell me what to buy and then I wish I had taken their advice, it's a sure sign that the market has reached a top and is due for a tumble.
(Dan Ferris covered all four of Lynch's market stages in an issue of the Digest last month. You can read that here.)
For now, we haven't seen the same insane stock price swings we saw during the meme-stock craze, when money-losing businesses all over the place were soaring higher. So we may be closer to Lynch's "Stage Three," where the market is up a lot (the S&P 500 made a new all-time high just last week) and folks are looking for ways to get into the market – like AI stocks.
Whatever stage we're at, though, the warning signs are starting to pile up... Small investors are putting more money into the stock market than ever, and sentiment readings are showing folks are increasingly bullish.
But as long as money continues to flow into stocks, there's no reason to sell just yet. As Jeff concluded...
Long story short, the retail crowd is fully committed to the markets for now, so you should stay invested and reap profits. But be ready to scale back when we do see inflows from the retail crowd start to slow.
So while you should stay invested, it's a good time to look over your portfolio, assess your risk, and make sure you have a plan for if and when markets turn lower.
Retail gives the 'smart money' an out...
In recent months, we've highlighted the trend of insiders and executives selling their shares. Specifically, we've covered this in high-flying retail favorites like Tempus AI (TEM) and MicroStrategy.
Insider activity is something to watch. These folks should know the most about the company, and their trades can give clues for how the "smart money" feels about the company's performance.
This trend of selling outweighing buying is still underway - and in some pretty big names, too...
Last week, JPMorgan Chase CEO Jamie Dimon offloaded $234 million in shares. That marked his first sale on the open market since last April and was a lot larger than the $183 million he sold in the entirety of 2024.
And at Palantir, with the stock at all-time highs and up more than 400% over the past 12 months, CEO Alex Karp filed a plan to sell more than $1 billion in stock. While Karp's sale got the headlines, he wasn't the only one... Four other Palantir insiders filed plans to sell their shares.
Altogether, these sales are a drop in the bucket for Palantir, which now boasts a $200 billion market cap.
But looking at how much Palantir has soared, this essentially locks in profits for the "smart money" and passes the risk on to the buyers – retail investors.
Right now, retail investors are happy to buy stocks. But that won't always be the case...
We'll close with our advice from earlier this month...
As always, we caution against taking outsized short-term risks – especially in "hot" retail stocks that are overvalued by any measure. At some point, investors who think nothing can go wrong today will be left holding the bag.
We're seeing some of this, given headline-making uncertainties over the past few months along with a "buy the dip" urge from retail investors. This mix can lead to volatility. But it doesn't mean the bull run is totally finished, either.
As our Stansberry's Investment Advisory lead editor Whitney Tilson put it last week, yes, there are "signs of market froth" but "these warning signs aren't extreme or widespread enough to make me think a general market crash is likely."
We'll also keep tracking market-sentiment indicators, along with others, before making such a declaration...
For instance, three of the four major U.S. stock indexes remain above their long-term technical trends. (The Russell 2000 Index is the exception, trading just below its 200-day moving average today.)
But you should be aware of the environment, temper expectations, and be choosy about what stocks you own.
New 52-week highs (as of 2/24/25): AbbVie (ABBV), Abbott Laboratories (ABT), Berkshire Hathaway (BRK-B), Gilead Sciences (GILD), SPDR Gold Shares (GLD), Kellanova (K), Sprott Physical Gold Trust (PHYS), Republic Services (RSG), UGI (UGI), ProShares Ultra Gold (UGL), and Verisk Analytics (VRSK).
In today's mailbag, feedback on yesterday's Digest about Warren Buffett's "case for capitalism" in his annual Berkshire Hathaway shareholder letter... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"I was intrigued by the headline to yesterday's Digest, 'The Case for Capitalism'. I think you can sum it up as such... Capitalism is built on freedom. It promises only opportunity but creates massive prosperity! However, socialism/communism are built on government control. They promise prosperity, deny opportunity and create only misery, poverty and oppression." – Stansberry Alliance member Jason L.
All the best,
Corey McLaughlin and Nick Koziol
Baltimore, Maryland
February 25, 2025