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Passive investing obviously is becoming a larger portion of the investing mix to the point where we have more ETFs investing than we actually have stock traders. And so there’s this element of automatic allocations. A lot of these are driven by market cap weightings, for example.
So to the extent that you have a lot of influence coming in from passive funds or ETFs, they will buy a certain set of stocks more actively than others, because it’s just the way it’s allocated. We saw that last summer -- and this is one of the things want to pay attention to, when you see divergences and deviations.
September - Year - Piece - Highs - Slope
In September of last year, I wrote a piece called “Lying Highs" in which I pointed out that we were seeing ever-narrowing slope of the rally, driven by fewer and fewer stocks. It’s kind of one of those classic 'popping' signs, but the problem with it is it doesn’t give you precise timing. This stuff can drag on, and on, and on. We saw that throughout all last summer.
So these passive investing vehicles come in and keep buying high cap tech stocks —remember, this drove Apple to $1 trillion dollars market cap, Amazon to $1 trillion dollars, and analysts kept raising their price targets. And so money keeps flowing in and stock prices go higher. It attracts more money, and that attracts more money, and that attracts more money. It becomes this pyramid scheme -- until something breaks. And that’s what we saw in the fall. The rally was just too thin leading up to that, and then required the technical downside reaction. That’s the danger of it.
Momentum - Reason
I like to say "Just because they’re buying doesn’t necessarily mean that they know what they’re doing." Because these momentum moves just defy reason. You got...
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