The Next Flush May Be a Generational Bottom

Call me crazy, but I’m beginning to like all this negative talk of broken markets, upset IPO investors, crooked CEOs, poor corporate risk management, and retail investor disgust.

The more I hear retail investors complain about “rigged markets” and “the one-percenters” while singing songs about the death of buy-and-hold investing, the more I think the next sizable sell-off is gonna be “The Big One.”

But I don’t mean the “Big One” in terms of percentage losses or capital destruction (although likely both could be huge), it’ll be big because the next big sell off could very possibly be the end of the stock market game for millions of investors in America and around the world. Why do I like this? Read on.

See, somewhere beginning in the late 80′s it started to become fashionable to “play the market.” Spurred on by rising markets and pop culture (think “Wall Street” the movie), baby boomers in white collar jobs felt like they wanted a piece of the action. Then technology stocks took off in the 90′s as Americans became more tech savvy and everyone wanted to invest in the future via stocks in companies like Microsoft, Intel, Cisco Systems, and Motorola, to name a few.  And of course, we all know what happened when internet stocks began appearing in the marketplace. The market ripped higher seemingly every day as anybody with $500 and access to the internet was opening up e*trade or Datek online trading accounts. The casino was open for business.

Fast-forward 12 years to 2012. U.S. Stock markets have essentially gone nowhere for more than a decade. Sure, money has been made by expert (and some lucky) stock pickers. But for the majority of investors playing the market via index funds and 401k’s, they haven’t had much to get excited about. And to make matters worse, they’ve had to endure several harrowing market collapses which they didn’t sign up for. More likely than not, many of these investors sold deep into the declines only to get back in near the highs for fear of missing out on the next bull market. Again and again.

Being that I’m involved with StockTwits, I am deeply in tune with trader & investor sentiment on a day-to-day and hour-to-hour basis. From my vantage point, traders and investors are extremely frustrated. It seems everyone is getting whipsawed (myself included) and the ones getting hurt the worst are chirping the loudest. And the roar is becoming deafening. Every week for the past year (probably longer) market participants have had a new “crisis” to deal with and I can feel the fatigue in their voices, in their blog posts, in their messages on StockTwits and twitter, and can even see it on the faces of the pundits on TV.

This groundswell of anger both amongst market participants on the screens and the “Occupy Wall Streeters” on the streets is laying the foundation for The Final Selloff. The Big One.

I have no special insight on when the Big One will hit. It could happen next week. Perhaps it won’t happen for a few years. I don’t know. But in this increasingly charged environment, with so much at stake, the next big selloff will likely be the end of the game for people trying to “play the market,” as well as for many of millions of investors who were told ad nauseum to buy-and-hold because on-average the stock market returns 9-10% annually over the long run (how lonnnnnnnnng?). This Big One will be the final nail in the coffin for all the weak-willed, over-leveraged, under-capitalized, or hobbyist traders with hot money and cold streaks. It will be the final straw for every Baby Boomer currently nearing retirement and freaking out about every 5% market downturn or any day $AAPL trades down. It’ll be the final insult to everyone who has been earning .0004% in their savings accounts and reached for yield in “safe” names like $JNJ and $GE.

The only players left will be the Hedge Funds and the HFT algos that game their orders. And the lights will dim on Wall Street.

Why is this a good thing?

This is what a generational bottom looks like.

It’ll be at this moment that Wall Street will be incentivized to get back to its roots and rediscover its original function: To raise capital to fund the growth of companies and industries that build and sustain America & the global economy. And when this happens, markets will return to a more normative state where fortunes can be made by investors large & small who invest in companies with fundamentals and prospects worthy of investment, without the risk of being distracted by all the short term games-players reacting to the latest over-sensationalized news item. The system will be purged of short-term gunslingers (they blew up their accounts in the Big One) and will be replaced by more rational thinkers. Pie in the sky? Perhaps. But this is what I’m looking forward to.

 

$SPY $QQQ $DIA $JNJ $GE $AAPL $MSFT $INTC $CSCO $MOT

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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