Mood Riffs: New “Investment Models” – What to Make of Them in 2024

Whether they know it or not, most of the country is playing the stock market.

The “equity culture,” as coined by the Elliott Wave Financial Forecast in 1999, has made a massive comeback. At the end of 2022, 58% of households had holdings in the stock market, according to the Fed’s Survey of Consumer Finances. That data lags by 11 months. Imagine what that percentage is right now. Given the market’s recent rally, the 2023 percentage of households in the stock market may be even higher.

In July 1999, Elliott Wave Financial Forecast showed a similar survey by pollster Al Sindlinger. The survey ran all the way back to 1974 and showed that, prior to 1990, the highest percentage ever recorded was 36%, which occurred near the peak in August 1987. Sindlinger also estimated that, based on interviews conducted in 1939, about 20% of households were in the market at the top in 1929.

Along with the public’s eagerness to be in the markets and “get rich,” recent years have seen a slew of IPOs, SPACs, penny stocks, and meme stocks to help propel the mania to new levels and further infiltrate the culture at large. One such craze is the attachment of pro athletes to various SPAC issues.

This isn’t the first time professional athletes have posed as investment advisors. Near the September 2000 peak, the sentiment of “Jocks Know Stocks” was also peaking. However, both jocks and investors alike got sacked by the bear market that ended in October 2002. So, athletes posing as investment advisors is a tip off that the market peak is nigh.

But what about pro athletes as investments themselves? This new form of share offering in professional athletes first appeared in May 2007. The plan was to sell “20% of all future on-field earnings to a trust, which would, in turn, sell securities to the public.”

The Elliott Wave Financial Forecast assessed the scheme this way:

“The ability to literally invest in sports figures marks a coalescing of positive mood forces. A big top is a perfect moment for sports stars to be re-packaged as investments because it is the point of maximum distance from an understanding of how painful it can be to lose everything, not to mention the risk of adding insult to injury when the asset you once had no more than a rooting interest in turns out to be a bum.”

The S&P 500 financials index peaked in May 2007. Five months later, the broader S&P 500 started its biggest decline since the Great Depression.

Recently, Sportico announced that athlete stock shares are back. Vestible, a Kansas City startup, intends to sell 60,000 to 100,000 shares (for $10 per share) in Baron Browning, a linebacker for the Denver Broncos football team. In return, investors will get a claim on 1% of his salary for as long as he’s a professional athlete.

Vestible’s founders expect to gain SEC approval “because of the past approval of similar ventures and regulators being comfortable with the surge in fractional securitization of other fan-focused offerings such as collectibles.”

That’s certainly true. A 2023 survey by ArtTactic, an art market research firm, found that 9% of art collectors bought fractional shares of art and 61% plan to do so in the next 12 months:

“Many see these new investment models as a democratization of an otherwise hard-to-access marketplace.”

We’ve heard this same word used to describe fractional purchases of stock shares and real estate. The Elliott Wave Theorist covered the bearish implications of their increasing popularity in October and May 2023 respectively.

And in democracy, everybody gets to vote. The implication of the democratization of the financial markets now is that “everyone gets rich.” But we think the outcome will be quite the opposite. Fractions of shares are the “gateway drugs” of an equity culture that will prove hazardous to their users.

In the old days, any order under 100 shares was called an “odd lot.” And one highly-effective timing tool was to fade out the odd lotters. With fractional holdings — today’s “odd lots” — arriving in so many far-flung investment areas, the sell signal is about as comprehensive as it can get.

This frenzy for stocks also comes with another strange phenomenon: The public’s tolerance for failure has never been higher.

A Fed survey finds that the median value of direct equity holdings fell dramatically from $29,000 in 2019 to $15,000 in 2022. The Fed surmised that the new entrance into direct stock ownership held smaller portfolios than longtime stockholding families.

It may also have something to do with the newbie’s bullheadedness. As the Elliott Wave Financial Forecast noted several times in the wake of the speculative peak, “the new buyers seemed to be impervious to declines” — even substantial flame-outs in some of the most ballyhooed favorites only seem to encourage them further.

GameStop is another prime example of the public’s tolerance for failure. GME is down 88% from its intraday high of 120.75 on January 28, 2021. But the faith in GME as a vehicle for wealth continues.

On January 12, TheStreet identified a board decision allowing GameStop’s CEO to invest corporate capital in “a much broader range of securities including stocks,” as a “bullish bet.” On January 22, TheStreet’s Meme Maven columnist added a host of “Reasons to Buy GameStop.”

There’s just no quenching the demand for GME shares. It goes all the way back to the top in speculative stocks in February 2021, which occurred after the GameStop’s price peak in late January 2021.

The mania for GameStop has even gone as far as to spawn a movie about the fanatical faith in the GME stock. Dumb Money debuted last fall, telling “one of the biggest stories of the year, about a ragtag group of amateur investors, gamers and Internet trolls who brought Wall Street to its knees.” As the movie poster reveals, the little guy is still flipping off Wall Street tradition. The flick ends with this witty reply:

Wall Street will never be able to ignore the “dumb money” again.

Nor should it. In terms of price, the stock price of GameStop appears to have been a long and grinding affair, but the performance appears to have little bearing on the outlook of some GameStop aficionados. Its renegade band of gamers and trolls have clearly “survived.” When all is said and done, the story of GameStop and its incredible grip on the bullish psyche of its loyal backers should serve as a reminder of what can transpire in the biggest peaks in positive social mood.

This chart shows the setup in the form of the SentimenTraders’ “Dumb Money Confidence” index. According to the SentimenTrader, a dumb money confidence reading of 100% (1.0) means that bad market timers are supremely confident in a market rally. The chart shows that a record 10-day average high of 0.88 occurred in December 14-17, 2020, a month and a half before the peak in GameStop shares and shortly before the stock market’s speculative top. The highest readings since then was 0.86 on December 27-28, 2023.

The readings on that chart bookend the topping process. The most recent extreme also supports the presence of a crest in optimism in conjunction with the two-year cycle. The marquee treatment of Dumb Money as the title appears to be yet another sign that the equity culture is maxed out.

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