Two Reasons for Caution

Everything was up today... Individual investors are bullish... A bearish indicator... 'Smart money' continues to sell... Diamond's Edge: More on inflation and Nvidia...

All appeared well today...

After a rocky finish to last week, the major U.S. stock indexes were mostly higher today... The benchmark S&P 500 Index closed up 0.5%, and consumer discretionary sector stocks continued to gain – a bullish signal we discussed last week...

The tech-heavy Nasdaq Composite Index moved 0.6% higher, and the Dow Jones Industrial Average and small-cap Russell 2000 Index were about even.

Longer-term bond yields also eased some... and "risk on" bitcoin rebounded above $91,000. Gold and oil prices were higher, too, making for an "everything is up" day among the major asset classes.

The major U.S. stock indexes remain trading above both their longer-term 200-day moving averages and short-term 50-day moving averages.

But before you get too giddy, I (Corey McLaughlin) want to share two reasons to be careful today...

Retail investors have an increasingly bullish outlook...

Today, several different measures show just how bullish individual investors are right now.

Now, this could sound good on the surface as a reason for this bull run to continue – which it might.

After all, if more investors are getting bullish, prices could keep going higher.

But as longtime readers know, when the "crowd" is thinking one thing, it's wise to think like a contrarian... or at least to be prepared for alternative outcomes.

First, let's look at the American Association of Individual Investors ("AAII") survey. This survey is simple... the association asks its roughly 150,000 members – mostly do-it-yourself investors – whether they're bullish, neutral, or bearish on stocks.

In the most recent week, nearly 50% of respondents said they were bullish on stocks over the next 12 months. That's the highest since September, closing in on the one-year high set last December, and well above the historical average of 37%.

About 40% of respondents said the outcome of the U.S. election "makes me more optimistic" about the short-term outlook for stocks...

And this is not the only sentiment survey that illustrates an elevated level of investor exuberance...

In last month's Conference Board Consumer Confidence Survey, 51% of folks said they expect higher stock prices over the next year. That's only the second time on record that the ratio has crossed above 50% (the other being April 2020).

Our Stansberry's Investment Advisory team also has its own proprietary indicator for gauging investor sentiment – called the SIA Money Flow Gauge.

It's a measure of the public's interest in the stock market, and it measures the net amount of money flowing in or out of stock mutual funds and exchange-traded funds ("ETFs") each month.

In our team's most recent Money Flow Gauge update, the indicator showed the highest reading in more than two years, meaning folks are piling into stocks...

Our team considers inflows of more than $20 billion to be a "bearish" indicator. So, this indicator is still flashing a warning signal.

You might notice notable drops in the S&P 500 around or just after previous instances when money flows hit peaks. There's a reason for that, as savvy investors know and as our team explains about this indicator...

The public's opinion about the attractiveness of stocks plays a significant role in stock prices. 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.

The 'smart money' is doing something different...

Throughout this year, our colleague Dan Ferris has been highlighting well-known investors who have been raising cash in the face of today's lofty valuations in stocks. And that trend remains alive and well...

Last week, Warren Buffett's Berkshire Hathaway (BRK-B) released its 13F filing, showing its portfolio moves for the third quarter. While Berkshire found value in shares of pizza franchise Domino's Pizza (DPZ) and swimming-pool-supplies distributor Pool (POOL), it was still an overall seller in the third quarter.

On a net basis, Buffett's holding company raised more than $34 billion of cash in the quarter, taking its total cash hoard to more than $320 billion. It was the eighth straight quarter Buffett was a net seller.

He's not the only one. Amazon (AMZN) founder Jeff Bezos sold about $2 billion worth of AMZN shares last week alone. In November so far, he has raised more than $3.3 billion in cash by selling stock.

With Amazon's price currently sitting at 43 times earnings, the stock is much more expensive than the broader market's valuation of 29 times earnings.

And executives at AI darling Palantir Technologies (PLTR) are locking in their own profits... With the stock more than tripling so far this year, the company's CEO offloaded more than $400 million of stock last week.

Palantir's valuation is even higher – trading at nearly 300 times earnings.

There's an old saying in finance... When the ducks are quacking, feed them. And right now, "smart" money – insiders and investing legends – see an opportunity to pass on the risk to bullish retail investors.

When regular folks go all in on the stock market, like what we're seeing today, it's usually a warning sign that the broad "good times" could be numbered. Dan's words over the past few months still ring true today...

That's not to say there aren't smart buying opportunities in this market or trades to make... But be careful about taking outsized short-term risks in today's market. Enough of the super-rich class are doing the opposite and cashing in on the recent euphoria instead.

New 52-week highs (as of 11/15/24): Alpha Architect 1-3 Month Box Fund (BOXX), Clorox (CLX), CyberArk Software (CYBR), Enterprise Products Partners (EPD), GEO Group (GEO), Kenvue (KVUE), Altria (MO), ONEOK (OKE), Stryker (SYK), Toast (TOST), ProShares Ultra Financials (UYG), and the short position in SolarEdge Technologies (SEDG).

In today's mailbag, feedback on Dan Ferris' Friday essay about "why it's time to hope"... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Dan, I have tended in the past several years to follow your usual negative outlook on the direction of the market and think that you actually may be on the right track – with your thought process, I have positioned our personal portfolio more to fixed assets rather than equities. However, as much as you want President-Elect Trump and his team to be successful for a better economy, I give you a thumbs down for not voting to support President-Elect Trump and his positive agenda. His appointees, thus far, are exactly the type who will have an opportunity to not only correct, but repair and have a transforming effect on our economic situation. Keep it straight, Dan." – Subscriber Mike R.

"Read this article and absolutely loved it. Hats off to you! Thanks for standing on your soapbox and putting it out there." – Subscriber Fred M.

"Thank you, Dan, well spoken! Let's drain the swamp!" – Subscriber Thomas S.

"Dear Dan, Thanks so much for this insightful article. I read your posts regularly, and your mantra to 'prepare, not predict' is very much appreciated!

"With the current amount of independent media, we will soon know who EXACTLY works toward the eventual complete demise of American Constitutional Government.

"Now, it is our job to flourish and prosper, instead of relying on 'the government' to support us." – Subscriber Cassandra A.

All the best,

Corey McLaughlin and Nick Koziol
Baltimore, Maryland
November 18, 2024