The Kennedy Secret to Spotting Market Bubbles

The year was 1929, and America was in the late stages of its greatest bull market to date.

Over the nine years prior, the Dow Jones Industrial Average increased tenfold to 381.17 at its peak on September 3 — enough to turn every $1,000 into $10,000.

Truly, fortunes were being made.

As the legend has it, one Joseph Kennedy Sr. was on the streets of New York a few weeks before the September peak in need of a shoe shine.

Like virtually anyone invested in the stock market, the 1920s were good to Joseph Kennedy Sr.

How could they not be? All you had to do was buy a stock and watch it go up!

While sitting in the shoeshine chair, Kennedy Sr. was alarmed to have the shoeshine boy gift him with several tips on which stocks he should own — yes, a shoeshine boy playing the stock market.

In that moment, it struck Mr. Kennedy that he needed to leave the market. In fact, he didn’t just get out of the market, he aggressively shorted it and got filthy rich from the epic crash that soon followed.

He reasoned that if shoeshine boys have an opinion on stocks, the market is clearly dangerously popular.

I mention this today not as a blanket dismissal of shoeshine boys, but to compare the overhyped 1929 market environment to the present day.

If Joseph Kennedy Sr. were alive today, would he be having a similar shoeshine moment?

Is 2019 Another Joseph Kennedy Shoeshine Moment?

After the volatile August month we just had, you might be thinking that now isn’t a bad time to finally hit the sell button like Joseph Kennedy.

After all, the bull market has been raging for 10 years, and there are plenty of uncertainties in the market like the ongoing trade war with China and Fed’s improvised monetary policy experiments.

But believe it or not, although the market saw wild swings of 1-2% on a near daily basis in August, the Dow only dropped 1.8% during the month while the S&P 500 only dropped 1.7%.

In short, the market’s bark was a whole lot worse than its bite. So much so that Merrill Lynch’s bull/bear indicator — which measures the market sentiment of Merrill Lynch customers — just hit its lowest level since January.

Bull and Bear Indicator

That’s right. Individual investors have become EXTREMELY bearish on today’s stock market…

Meaning this is nowhere near the Joseph Kennedy moment back in 1929, when even the shoeshine boys were doling out stock tips.

This is the exact opposite!

Market crashes and terrible bear markets happen when investors get too excited about stocks and invest way too much. And then something happens to disappoint that excitement and the skittish investors pull all their money out, causing stocks to crash.

At this point, the skittish investors don’t have enough money in the market to cause a crash.

But I guarantee that as stocks continue to rise — mostly from the pros on Wall Street recognizing the vast sums of money on the sidelines — the “fear of missing out” will soon overwhelm individual investors to a point where they’ll buy back in at any price.

In fact, this is a phenomenon that has happened over and over to the point where my good friend — who is a financial advisor at Merrill — often jokes about how he gets the most calls from clients wanting to pull out of the market right before the market usually goes on a big upswing.

And unfortunately for the average investor, this is looking like another one of those times.

Bottom line: Don’t fall into the trap. Joseph Kennedy Sr. wouldn’t be blowing the whistle at today’s market as this is not the type of action you typically see before a big market decline.

I’m still very bullish on this market and recommend that you use any significant pullback as a buying opportunity.

And as always, stick with The Daily Edge as we continue to monitor the action. And if anything changes you’ll be the first to know!

Here’s to keeping your edge,

Davis Ruzicka

Davis Ruzicka
Managing Editor, The Daily Edge

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Davis Ruzicka

Davis Ruzicka is the Managing Editor of The Daily Edge. Davis is an experienced value investor with a degree in Finance from The University of Maryland. Today, Davis is pursuing his Chartered Financial Analyst (CFA) designation in his spare time while continuing to learn from seasoned investors Zach Scheidt and Alan Knuckman.

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