The Dumb Money Is Helping The Smart Money Exit The Stock Market

The comments above & below is an edited and abridged synopsis of an article by David Haggith

The smart money gets out of the stock market when it hits its all-time peak, and the dumb money helps the smart money out. It typically happens this way:

At the end of a euphoric rally when the market is preparing to crash, everyone is opening trading accounts and chasing the tail of market action. Many throw in their entire retirement funds and incur credit card debt to buy as much as they can. By buying in late, they help provide a smooth exit for the smart money.

That appears to be happening now. While retail investment (at the mom-and-pop level) in stocks mushroomed last quarter, household debt also grew, jumping at an annual rate of 5.2%, which is the fastest pace since 2007. Consumer credit rose at an annualized rate of 7.8%. Consumer credit card debt just topped out at over a trillion dollars, while savings bottomed out to one of the lowest rates in history.

It’s hard to say what all that debt and all those savings were used for, but the change in both matches the pace of growth in retail stock investments. With no hard connection in those numbers, it would be difficult to claim them as proof that people are taking out credit card debt and depleting their savings to buy stocks, but that correlation certainly matches up with anecdotal accounts that many stock brokers are reporting.

Haggith discusses: All Trumped up and nowhere to go; share buybacks surging; the Niagara Falls of debt…again; and the exodus is under way.