Why The Crowd Always Loses | Podcast Episode #93

0:00
Hey, everyone, this is Ryan Mallory with Swing Trading the Stock Market. And today, we’re gonna talk about why the crowd is always wrong. And what does that mean in today’s stock market? We’re gonna get all into that and more. Hey, by the way, before I get into it though, before we start talking about it, I want to encourage you to check out the YouTube channel, YouTube.com/share.

0:17
Planner. Lots of great content. I’m putting market updates out there on the weekends. I’m usually doing another video in the middle of the week. It’s a lot of work. I want to keep that up. I want you guys to support it if you can. All you gotta do is just go to the channel, like, like the videos that you watch and subscribe to the channel would mean a lot.

0:34
I’d appreciate that. So, let’s go ahead. Let’s jump right into this podcast episode. Why the crowd is always wrong. So you have this exploding market right now. We had the COVID-19 pandemic where the S&P 500 dropped somewhere like 35, 36% off of its all-time highs, the fastest pullback into a bear market in history.

0:55
Is that surprising? No, it’s not. I mean, maybe the, the velocity that it did, but we, we literally shut down an entire economy instantaneously, a global economy overnight pretty much got shut down. So I can understand the, the sell-off. And then you get this explosive counter out.

1:11
And so everybody’s like, oh, it’s a V-shaped bottom, man, we are going right back up to the highs. There’s nothing to fear. We’re going straight back up and that. Maybe that that happens. You know, there’s this popular expression in the stock market that that people used to say a lot, and they’re saying it a lot right now.

1:26
They said it actually the most that I had ever seen back in late February before the market started taking off. I saw it a lot back in December and January too, but it just hit fever pitch back in February, mid-February or so. And that’s, it’s different this time.

1:43
This time, the market’s going to keep going higher because X, Y, and Z, it can keep going higher. It’s S&P 500, it’s going to 4000, down to 40,000. And then all of a sudden you got the big sell-off. You weren’t hearing that anymore. But guess what they’re starting to say this time? It’s different this time. V shape bottom, unlimited QE, the Fed’s pumping the market up.

2:01
Don’t fight the Fed. How many times have I heard that? It’s probably as many times as I’ve talked about dead cat bounces, to be honestly. Apparently there’s a drinking game on my YouTube channel where people actually take shots every time I say dead cat bounce. But anyways, don’t fight the Fed. I’ve been hearing that one.

2:16
And I think if I took a shot every time somebody said, don’t fight the Fed, I think I’d be wasted quite quickly, to be honest. So we’re talking about reopening, we’re talking about cases are going down, deaths are still, you know, pretty high. I mean, we’re over 80,000 now, but the market is just ripping higher and you got all these people piling in their money into some of these high-risk momentum plays like Shopify.

2:36
You’ve got Wayfair. Wayfair is like up like 1000% or something crazy like that. I’m not sure exactly what it is, but I know it’s like 7 or 800%. Crazy. It was like trading at $20 and it’s like almost $200 I think. I mean, that’s a crazy move for a month and a half. And that’s a billion dollar company too.

2:53
So you’re not talking like a penny stock. That’s what you kind of see out of a penny stock. You got SPC trying to hold up. I mean, SPC is not too much different than what it was prior to the pandemic. Chipotle, they don’t even have a dine-in option right now. It’s only takeout. I mean, granted, their takeout’s doing a lot better than what it would do during the pandemic, but I wouldn’t imagine that they’re doing better than they are under normal circumstances, but yet they’re trading at all-time highs.

3:17
So there’s a lot of stocks trading all-time highs. You got Nvidia trading at all-time highs. You’ve got Netflix right by its all-time highs. Amazon, that one’s through the roof. So is Apple. Apple is like up like 9 out of the last 10 days or something crazy like that. So there’s just this unfettered buying. So the market really can’t go down because these big $1 trillion companies like Microsoft, like Apple, like Google, like Amazon, and then you got ones that are on the verge of it, like Facebook.

3:42
Just going through the roof. They’re the five biggest companies in America right now. And so what do you do when the NASDAQ 100 is comprised of the five biggest companies, and that’s all anybody wants. That’s the flight to safety play. It’s also a growth play apparently too. But yeah, everybody’s putting their money into it, so it keeps that up.

3:58
For the S&P 500, you’re looking at like 23 to 25% influence over the entire S&P 500 based off of those five stocks. So how strong is that? Well, let’s say this. Let’s say that the S&P 500 had those five stocks go up 2% each one day.

4:16
And let’s say that the other 495 stocks on the S&P 500 went down by a little bit more than 0.6% on average. Pretty good bit of selling, right? You would essentially have a 99 to 1 breadth in the market for the S&P 500. And yet, guess what, the S&P 500 would be by my calculations, and I could be wrong on this, but when I was doing the calculations, if those five stocks went up 2% each.

4:39
The S&P 500 would be up on the day, just a little bit, but it would be up. That is crazy. So these stocks, these five stocks have an incredible sway over the market, and that’s why you’re seeing not as much bullishness out of the Russell because they don’t have any of those stocks in its index, but the S&P 500 and the Nasdaq, and some of the Dow does have it, and so it’s pulling up the Russell a little bit by sympathy.

5:00
But overall, that is a lot of power concentrated in that. And in past history, the last time you saw it where five companies had this much sway, it was back in 2008. We know how that story turned out. But then you get this thing called the Robin Hood bros. I don’t know. I don’t know if I heard this off of somebody or if I came up with the term myself.

5:18
I’m not sure, but I call it the Robin Hood bros, and some of you guys, you guys might be a Robin Hood bro, okay? And I’m not trying to knock you guys. I’m not trying to knock you guys for using Robin Hood. I don’t think it’s a great trading application, to be honest. I would be using something better than that. Yes, they all have their downside, but overall, I don’t think Robin Hood’s the best application to be using.

5:38
But a lot of people are piling into it for the first time. I don’t even think they realized that there were some outages not too long ago during some pretty crazy days in the market with Robin Hood. And so people got short-term memories, I guess, or they just, they don’t realize it. But people are, I don’t know if they’re taking their stimulus checks or if they’re taking their tax refunds or if they’re taking their unemployment checks and they’re putting into the market, or they’ve just been sitting on a ton of cash for a long time, right?

6:02
And so I’m not, again, I’m not trying to offend you guys or anything like that. I’m just trying to tell you this is a phenomenon, because I think I saw a chart yesterday that 17 million positions were open pre-COVID on the Robin Hood platform. Since then, it’s up to like 33, 34 million positions.

6:18
Dude, there is a lot of people putting their money into the Robin Hood app right now. And it’s not just them. I think TD Ameritrade is like almost like doubled their number of funded accounts. People are just piling that money in. So there’s a lot of retailers getting into this. So do we actually think that the retailer is going to be right on this?

6:36
No, I don’t. What they’re doing is they’re buying the dip because they’ve seen that’s what’s worked historically and so I’ve seen a bunch. I’ve been tagged on it a bunch. They’re, they’re talking about how, oh man, I’m buying this dip, I’m buying when everyone else is panicking, and they think that they’re somehow being novel about it. They’re not. Everybody else is doing it too.

6:52
And so you got this herd mentality, this FOMO, you got this you only live once mentality of just buying this dip and just driving the market higher, and they think that they’re the only ones doing it. They’re not. Everybody’s like, oh man, I know what I’m doing. Trust me, if you saw my texts, I can’t even get back to people on texts right now, okay?

7:09
I have so many texts that are coming in from people wanting to get into the market for the first time. Still, still, S&P 500 is like 30% off of its lows or something crazy like that. You got people that want to buy into this market still. They’re fearful of missing out on this big run.

7:26
You go on the like stock twits message boards. Guys, the whole thing’s bullish now. I mean, it’s as bullish as it’s ever been. They’re buying the dip, they’re putting their faith in the Fed that the Fed will continue to buoy this market higher, provide a support underneath. And there was an article in the Wall Street Journal that was talking about how the Gen Zs and the millennials, they’ve missed out on so much of this rally from 2009 lows to current time.

7:52
That they’ve been waiting for this opportunity to buy the dip and buy the dip they have. But if they’re wrong, what does that mean? That means it’s gonna be some pretty bad laity. They’re going to be worse off than they were before this whole mess started. Now what I find interesting too, guess who has not bought the dip? Warren Buffett. And I’m not the biggest Warren Buffett fan.

8:10
I’m not taking away from any of his success. I’m not the same kind of, I don’t have the same kind of approach to the market as he does. He has this like buy and hold forever mentality. Rarely does he sell much. He’s sitting on like $150 billion worth of cash, took a $50 billion loss in the previous quarter.

8:26
He didn’t touch this market on the sell-off. In fact, if anything, he sold positions. He sold his airlines. And yet, what’s going on? Well, you got the Robin Hood bros. They’re coming in there. They’re sweeping up those airline stocks, hoping that they know better. But do they? I don’t think they do. I have not touched the airline stocks.

8:43
I won’t touch the cruise lines either. Cruise lines are gonna get sued probably. There’s a lot of problems for those cruise liners right now. Royal Caribbean, I would not touch with a 10 foot pole, nor would I have a Carnival Cruise or Norwegian Cruise Line in CLH. So the other thing too, a lot of people are blown away by how much this market has bounced.

9:00
They’re saying, man, have you seen how hard the bounce was? Well, here’s the thing, people get consumed with how much of a percentage balance that the markets had. That’s really not what you want to concern yourself with. What you want to concern yourself with is the percentage of the retracement. So let’s say it goes from 100% down to 50 and I’m just using simple terms here, simple numbers, easy numbers to work with from a percentage standpoint.

9:18
It goes from 150 or 100 to 50 and then it goes back up from 50 to 75%. That’s a 50% retracement retraced 50% of its losses. So right now, the S&P 500 has retraced about 61.8% of its losses. That’s really not an unheard of kind of thing here.

9:35
We’ve seen that in previous recessions. We’ve seen that in major sell-offs, we’ll see a 61.8% retracement. There’s three that you usually see. You see a 38.2% retracement or a 50% retracement or a 61.8% retracement. Yes, you can see more between like the Nasdaq 100, this thing’s like almost trading at all-time highs again, so it’s blown through those retracements.

9:54
But for my trading purposes, I lean on the S&P 500. So that’s what I’m looking at for my trading decisions. And right now it’s at 61.8%. It’s been testing it for like the last two weeks. Hasn’t been able to break through it yet. But instead, what we should be focused on is the retracement levels, not the actual percentage bounce because the percentage bounce is going to be a lot more extreme.

10:13
The market sells off like 36% like what we saw, it’s going to have a 61.8% retracement. It’s going to be pretty extreme, especially when the sell-off took place in like about a month’s time before it bottomed. I mean, sometimes you get a 36% retracement. You’re expecting that to play out like over many, many months, not one month.

10:31
Also, the other phenomenon that I’m seeing too is that the market when it does sell off during the day, it creates these lows around 10:30 to 11 to 11:30 and then you’ll get like a commo presser or you’ll get some kind of random press release and the market will rally throughout the day. If it comes back and tries to test those lows, it holds it every time.

10:48
It’s infuriating because you can’t get a break of the intraday lows. If you’re short, you can’t get any kind of momentum to the downside beyond what you see typically in the first hour of trading. If you get a gap down, the market starts to dip within the first five minutes of the open. So with these Robin Hood traders and these people who are trading for the first time, young traders, they’re buying into this market.

11:06
They’re getting into the riskiest assets. That’s why you’re seeing stocks like Roku and Shopify. Yes, I know there’s some fundamental stories there that’s keeping it propped up as well, but they’re flooding into these things. They’re flooding into these high-flying stocks. They’re flooding into Tesla. They think that that’s where they’re gonna make riches. They’re looking to become millionaires out of this whole thing.

11:23
And what do you always hear me talk about on the podcast? Don’t worry about profits. Manage the risk and the profits will take care of themselves. People don’t get that in most cases, and new traders never get it. New traders are all about make me money. Make me money, man. What are we trading today? I want to make some money.

11:38
Guys, that’s what kills you in the stock market. I’ve been doing this too long to tell you to focus on the profits. When you start looking at the profits, when you start getting worried about what you could have done with that money if you hadn’t traded that or what you could do with the money if you cash out now for profits.

11:54
That’s what gets you into trouble because you’re not trading off a technical analysis or if you’re doing fundamentals, you’re not doing it off of fundamentals. You’re doing it based on what that money means to you. And that’s bad. That means you’re not trading correctly, you’re not trading appropriate position sizes. And so these traders are piling into these very high-risk plays. They’re not using stop losses.

12:10
They don’t know what it’s like to just get completely hammered on a trade that you’re right on. A lot of these people have been right the whole time. They don’t even know what these losing trades are like because the market has just been so forgiving over the last seven to eight weeks. But the market’s never going to let the majority of traders be right. It’s just not. It’s going to burn the majority of traders.

12:27
So sometimes staying on the sidelines, or just simply following the trend and using stop losses, that’s what you want to be doing. You don’t want to just be blindly hoping that the market always goes up, that the market forgives your senses. When the market does not reward your trade and you take a hit on the trade, have a stop loss there that’s going to prevent it from going from bad to worse.

12:46
So all these Robin Hood traders, all these Robin Hood bros, as I call them, they’re gonna get burned. They really will. I mean, it may not happen today or it may not happen tomorrow, but eventually, soon, they will get burned. They will get too cute for their britches, and they will think that they know more than what the market knows.

13:02
They think that they can impose their will upon the market and ultimately that’s going to fail for them. They’re going to get destroyed. So if you’re one of these guys, hear what I’m saying. Listen to what I’m saying, manage the risk. Know before you ever get into a trade where you’re going to get out at. Use stop losses. Don’t go after high-risk plays.

13:18
There’s plenty of plays out there. You don’t have to jump into penny stocks or some of these high-flying trades like Wayfair, almost $200. Guys, don’t do that stuff. Don’t do it. Don’t trade because you’re fearful of missing out on something. Plenty of times in your trading career you’re going to miss out on good plays.

13:33
I miss out on things all the time. Guys, I haven’t been fully loaded up on this rally, and I don’t regret it either. I’m managing the risk. That’s all I care about. It’s managing the risk. I may not make a ton of money off of these explosive dead cat bounces. That’s fine. The market tanks. I’m gonna be in a good situation.

13:49
I’ll be ready to profit. I still have stocks like SMAR and Netflix in the portfolio. They’re doing fine. They’re making me money. But look, I’m not going to blindly sell myself to the upside here thinking that all is done when we have 15% unemployment and we have job losses going lower and we have unfathomable amounts of debt. This is a time to be very concerned about the stock market.

14:10
You can still make money from it, but guys, manage the risk, man. Risk has got to be priority number one. I talk about that in every podcast. Why? Because I know for a fact it works. So what am I gonna do with every podcast episode? I’m going to tell you what works and there’s one simple thing that works every freaking time, and that is manage the risk.

14:32
Always use stop losses. If you do it, you’ll make it somewhere. You’ll be way ahead of the game. Most people do not do it. You do it, you’ll be all right. All right, that’s gonna do it for today. If you have any questions, feel free to hit me up. Email ryan@shareplanner.com. Thank you guys, and God bless.