Most of the Money Comes in at the Top

Testing your resolve... Dramatic price leaps... Big week for commodities... The war in Ukraine played a role... ARKK's money flows... Most of the money comes in at the top... Five 'no brainers'... Stay the course...

I'm in tune with the times...

Or maybe I (Dan Ferris) am just the beneficiary of lucky timing.

I'll let you decide, since I'm too human to feel like it's pure luck. I'm talking about the timing of my last two Digests...

Two weeks ago, I warned you that asset prices don't glide... they leap.

Then last week, I told you not to let big, scary headlines about the war in Ukraine entice you into believing you needed to make big changes in your portfolio.

This week, the market tested that resolve I recommended you adopt by starting off with a plunging stock market on Monday... And it proved beyond a shadow of a doubt that commodity prices have the ability to make huge leaps starting Tuesday.

Russia is a major producer of nickel, oil, and wheat ‒ causing prices for all three to leap off the charts. Since the war in Ukraine began, some key commodity prices have leapt like never before.

Twice this week, big price leaps inspired bone-headed actions by folks who should know better...

The most dramatic leap was in the price of nickel, which trades on the London Metal Exchange ("LME")... Russia is a major nickel producer. Traders anticipating western sanctions bid the price up fast this week. The price leapt 70% on Monday and doubled the next day, to $100,000 per tonne.

The drama didn't stop there... The big upward price move threatened a large short seller so the LME halted trading and took the shocking, unethical route of canceling trades to protect the seller.

In other words, LME gatekeepers stole some traders' profits to keep one client from going broke. It is 100% not kosher. If that happened to me, I'd be calling lawyers and getting ready to go to battle with the LME...

So why did they do it? Hong Kong Exchanges and Clearing House ("HKEX") owns the LME, and the client is Xiang Guangda, the billionaire founder of China's biggest stainless-steel producer, Tsingshan Holding...

Guangda says he's not reducing his position, making him sound like the Somali pirate who told the captain of a tanker he was hijacking, "I'm the captain now."

The price of oil leapt 32% from February 24 through March 8... It's fallen since but is still higher than it was before the war started, and it's still above $100 a barrel.

Amid the dumbest rhetoric in the world, President Joe Biden said, "Paying more for gas is your patriotic duty to help Ukraine," then he banned Russian oil imports and is now thinking about negotiating with barbaric, America-hating regimes like Venezuela, Saudi Arabia, and Iran for some of their oil...

The poor old fool doesn't even know how to virtue signal properly. Who knew it was that hard?

The price of wheat rose 50% from the start of the war through Monday, March 7... Wheat futures went "limit up" five days in a row, meaning the price moved as far as the commodities exchange would allow.

Wheat prices rose more than 40% in a week, breaking a record set in 1975.

It's probably wise to expect more sanctions, from both sides of the Russia/Ukraine war. Russian President Vladimir Putin already said he'll stop exporting uranium... That will boost the cost of uranium for U.S. electric utilities and their customers.

You probably don't need more examples... Stories about leaping commodity prices were everywhere this week.

Suffice to say, I warned you about leaping prices in the nick of time. Also, the events surrounding the nickel and oil price moves show you the kind of weird hell that can break loose when prices leap farther than anybody expected...

It's easy to conclude that the war in the Ukraine caused the price leaps...

That might lead you to believe big price leaps require rare extreme events before they'll happen. But that's not necessarily the case... Commodity prices had already been rising for a year before war broke out. Maybe the war just caused them to move in the same direction, but faster.

Price leaps don't need an overt catalyst like war. Like I told you two weeks ago, price leaps are an inherent feature of markets. Limits and trading halts can't prevent them, whether we're talking about leaps up or down...

Digest readers know I think it's possible for the S&P 500 Index to leap downward more than 20% in a single day... even though there are protocols (called circuit breakers) in place at the big stock exchanges that are designed to make that impossible.

I won't rehash my reasons for believing that, but I do think a big one-day crash lasting anywhere from minutes to a full day to weeks is more likely than not in the coming year...

That's because investors are set to rush out of the stock market the way they've rushed out of the ARK Innovation Fund (ARKK), which I've reported on several times starting the day before it peaked on February 12, 2021.

Investors have already poured money into the market the same way they poured record amounts of money into ARKK in the few months of the run up to its peak closing price of $156.58 on February 10, 2021...

At that point, the fund had risen 351% off its March 2020 COVID-19 bear market bottom. As of yesterday's close, it's fallen about 61% from its peak.

The point here is not just that ARKK has fallen so much. It's that it fell so much starting right after a record amount of money flowed into it.

Investors put more money into ARKK in three months – $8.59 billion in December 2020, January and February 2021 – than in the entire history of the fund from inception in October 2014 through November 2020 ($7.99 billion). More than $3 billion flowed into ARKK in both December and January.

The fund fell 34% three months after its price peaked, which happened just days before its 30-day cumulative inflows peaked.

Unfortunately, in financial markets, most of the money often comes in at the top...

It's especially common in stocks, exchange-traded funds, and mutual funds after they've seen epic short-term bull runs... Investors chase performance and get burned.

This chart below of ARKK's cumulative rolling 30-day net inflows is simply a picture of a full-on speculative mania...

You can plainly see 30-day cumulative net flows into ARKK going sideways for several years, rising in 2020, then going ballistic starting in December 2020 ‒ after the fund had soared nearly 150%.

Cumulative 30-day flows had rarely been anywhere near $500 million in any 30-day period. Suddenly in-flows soared to more than $1 billion, then quickly to more than $4 billion and nearly $6 billion... as wide-eyed investors chased the blistering performance in the rear-view mirror.

Then you can see the flows into ARKK peaking on February 22, 2021, 10 days after its peak closing price... It was all downhill from there.

Fund flows plummeted, spending much of 2021 in negative territory. ARKK's share price fell 24% in 2021 and has fallen another 37% so far this year.

Investors did the same thing with the entire stock market that they did with ARKK. As Bloomberg reported in November...

Investors have poured almost $900 billion into equity exchange-traded and long-only funds in 2021 ‒ exceeding the combined total from the past 19 years ‒ according to analysts at Bank of America Corp. and EPFR Global.

I realize $900 billion is nothing compared to the tens of trillions in market cap of the whole U.S. stock market. But I think it's entirely accurate to extrapolate from the data and say that...

More money went into stocks in 2021 than in the previous 19 years combined...

As you'd expect, the market's trajectory up to its top was similar to ARKK's.

By August 16, 2021, the S&P 500 had doubled from its March 23, 2020 COVID-19 bottom. It rose nearly 27% in 2021, an exceptional one-year rise...

If that plus the huge influx of new money were all you knew about the stock market in 2021, you'd lower your expectations for 2022.

Of course, I know that ARKK is not the entire stock market and that most folks will say it's dumb to expect the entire stock market to behave like a single fund.

I don't care what most people think... and I'm 100% certain the folks buying and selling stocks are all humans.

Humans get scared and they panic. They indulge in recency biases, expecting the near-term future to resemble the near-term past... When they expect more big gains and get quick, big losses, they are disoriented and confused and vulnerable to panic.

That's especially true of humans who don't know what they're doing. Warren Buffett holds businesses "forever" because he really, really knows a lot about them.

Warren Buffett knows what he is doing...

I'd bet most people buying stocks for the first time in 2021 – the ones who put more money into stocks last year than in the previous 19 years combined – don't even know what stocks are.

All they know is that prices can go up a lot – very fast – and make them a lot of money easily. They know how to hit the "buy" button. Newbies using the Robinhood Markets (HOOD) trading app might know a little more than that, but not a lot more.

When it becomes clear that stock prices can fall as well as rise, all that new dumb money will have none of the conviction of a knowledgeable shareholder like Buffett.

They'll just know that stocks go down and how to hit the "sell" button and not a lot more. They're probably already getting disoriented and confused. And let's be clear, this is not a new phenomenon. It's all happened before...

Folks went crazy for stocks in 2021 the way they did in 1928 and 1999...

And what happened next in both of those episodes appears to have started happening again this year...

The Dow Jones Industrials Average rose 47.5% in 1928... It peaked on September 3, 1929, and it fell 48% through November 13, 1929.

The Nasdaq rose 84% in 1999. It peaked in March 2000 and fell 54% through December 20, 2000...

In both cases, the losses in the weeks and months after the top were just the beginning. Two more years of downside lay ahead.

History doesn't repeat, but it tends to rhyme. A similar outcome may lie just ahead – a drawdown of 40% to 50% over the next few weeks or months... and a bear market extending into 2024.

It's true that bear markets can be short, like the one-month COVID-19 bear market of March 2020... Or they can be years long, like the Japanese bear market that peaked in December 1989 and didn't finally bottom until June 2012.

Usually, we expect them to last between six months and two years. This time around, we'd expect it to last at least a year and to take the S&P 500, Nasdaq, and Dow Industrials down 40% to 60%.

But I'm mostly not worrying about bear markets today.

I'm more concerned about a near-term crash...

Crashes can last anywhere from minutes to weeks.

In the "flash crash" of May 6, 2010, the Dow fell 1,000 points and recovered within about 15 minutes... It's believed to have been caused by a single trader, who was later indicted on 22 charges, including fraud and market manipulation.

Or a crash can last for a few weeks. The Dow lost 44% of its value from October 10 to November 13, 1929. That was similar to the March 2020 episode... except that the Dow had a lot more downside in 1929, eventually closing 89% below its September 3, 1929, high close on July 8, 1932.

If you want to know when investors have started to give up and a panic-induced crash becomes even more likely than today, just remember...

An old Wall Street adage says...

First, they shoot the foot soldiers, then they shoot the generals...

It means weaker stocks fall apart before the strongest market leaders... Today, the top five stocks of the S&P 500 and Nasdaq are the highest-ranking generals.

Five stocks – Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN), and Tesla (TSLA) – make up 24% of the S&P 500 Index's value and 42% of the smaller Nasdaq Composite Index...

They're viewed as no-brainers whose businesses will rule the world forever and whose stocks can't lose. It's hard to find any investor anywhere who isn't bullish on all of them all the time.

Here they are, compared to the S&P 500 and Nasdaq peaks through yesterday's close...

Four out of five are down more than the S&P 500 since the index's January 3 peak. Two are down more than the Nasdaq since its November 11 peak.

Maybe they haven't been fatally shot, but there's some serious bleeding relative to the two indexes. Will it get worse over the course of this year... or will their wounds heal?

I don't know, but I'm prepared for the worst by holding cash and gold, both of which have performed well since stocks began to falter starting in November.

When investors start selling the generals indiscriminately, you'll know they're desperate to raise cash... The only thing they'll want at that point is out of the stock market as fast as possible.

After you've sold all your speculative garbage (the foot soldiers) and you're still watching your account fall in value every day, it's just too much for most folks. And it's sure not for folks with unrealistic expectations brought on by inexperience and ignorance.

We're not quite there yet, but we've had a small taste of it... It's all a prelude to the inevitable end to the great bull market that started in 2009.

Last year, every speculative piece of garbage from ARKK to meme stocks soared out of sight, suggesting that most of that new money was from folks who didn't know what they were doing.

They were like the old cowboy comedian Will Rogers who said... "I buy stocks that go up. If they don't go up, I don't buy 'em." They didn't know what they were buying, nor how much risk they were taking. All they knew was that stocks were going up and they were buying.

Well, sometime soon, maybe this year, they'll start selling as indiscriminately as they bought in 2021. They'll flip the Will Rogers script and sell stocks that go down... and the farther they go down, the more they'll sell.

As the S&P 500 approaches the negative 20% bear market threshold, investors will become more desperate. They'll sell whatever they can sell, regardless of the quality of the business. When that starts happening, the odds of a big short-term crash will increase.

So I will leave you with this...

First, sell the last of your speculative garbage. Stocks have been falling a lot lately. You'll probably get a nice rally any day now to help you do that...

Next, be sure to hold onto plenty of cash, gold, silver, and bitcoin... The latter three will fall in price if the panic gets bad enough, but they're still the type of assets you don't want to be without.

I expect all three to perform well through a bear market bottom. I consider all three as permanent holdings appropriate for long-term wealth preservation.

Look out below. I suspect you ain't seen nothin' yet.

New 52-week highs (as of 3/10/22): Altius Minerals (ALS.TO), Bunge (BG), Black Stone Minerals (BSM), Mosaic (MOS), VanEck Vectors Oil Services Fund (OIH), Royal Gold (RGLD), Rayonier (RYN), Telekomunikasi Indonesia (TLK), Sprott Physical Uranium Trust (U-UN.TO), Wheaton Precious Metals (WPM), W.R. Berkley (WRB), and SPDR S&P Oil & Gas Exploration & Production Fund (XOP).

In today's mailbag, Ten Stock Trader editor Greg Diamond responds to a question about his forecast for more stock market volatility in the weeks ahead... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"This is a question for Greg Diamond with Ten Stock Trader... I believe you are expecting something big at the end of March, beginning of April. Is it possible that since so much has already been done that we won't see such a big move?" – Paid-up subscriber Rose F.

Greg Diamond comment: Good question, Rose. This is where bear markets catch investors off guard. The first leg down is scary, then there is a big relief rally, only to start the next (bigger leg) down.

This is what I'm expecting the end of this month and the beginning of April. Over the next two weeks, I will have a detailed analysis of how this setup happens, where I could be wrong, and what we'll trade.

Stay tuned... and for anyone who isn't following along with Ten Stock Trader already, click here for more information on how to get started. With a subscription, you'll get access to all my research, including immediate notifications of my intraday market updates... trade recommendations... and a library of special reports that detail how to put my advice into action.

Good luck,

Dan Ferris
Eagle Point, Oregon
March 11, 2022