It’s a classic setup: Wall Street’s “smart” money is on one side and the typical retail investor is on the other. Don’t know who the smart money is? Our December Elliott Wave Financial Forecast spells it out and tells you exactly what they’re doing in the stock market:
The next chart shows one of the many ways in which investors pushed the conviction to own stocks to heights that may stand for a generation or longer. At the outset of the rally from August 5, the September issue of EWFF observed an unusual condition: “The little guy is now seen as leading the way into another major market advance.” As shown on the chart below, enthusiasm for stocks has clearly gone past the stratosphere:
The week of November 26, Small Traders’ net long position in S&P 500, Nasdaq 100 and DJIA index futures surged to $100.20 billion, as reported in the weekly Commitment of Traders report. The extreme of September 2021, which foreshadowed the November 2021 and January 2022 tops in the major stock averages, was $42.06 billion. So, from the front edge to the final edge of the unfolding peak, small traders’ positioning for a rally in the stock averages increased 138%, another indication that the unfolding decline will be the largest in our lifetimes and probably the largest in the history of the country.
Last month, we wrote about a quiet exit on the part of the “smart” money. Specifically, we referenced sales of shares by corporate insiders, a trend that has continued. Commercial hedgers are also heavily weighted to the downside. The bottom graph on the chart below shows that the combined commercial- hedger position in the S&P 500, Nasdaq 100 and DJIA index futures plunged to a record -$169.20 billion the week of November 5. The prior record of -$147.68 billion occurred the week of January 25, 2022, just three weeks after the start of a 28% decline in the S&P 500 to October 2022. According to these futures positions, Small Traders have never been more bullish, and Commercials have never been more bearish, a combination that appears perfectly aligned for what will be a historic decline in stocks.
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