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“Trash Stock” Speculation Signals Dangerous Trend

June 14, 2020

“Trash Stock” Speculation Signals Dangerous Trend

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Last year’s yield curve inversion and repo market troubles are both longer term signals for the end of a market cycle.

While not perfect, we can add an increase in “trash stock” speculation as another potential signal for the peak of the market cycle.

That signal may have arrived, according to ZeroHedge:

In nearly every market cycle, speculation in low-quality, virtually valueless and literally bankrupt stocks, marks a market top.

This brings into question the Dow’s recovery that began in late March, which has humbled Stanley Druckenmiller:

That Fed stimulus, combined with investor excitement about the gradual reopening of U.S. business, is leading to broad outperformance among those stocks hit the hardest in March… He added that the technical momentum the market has right now, what he called “breadth thrust,” could carry equities even higher.

The Fed stimulus pumped trillions into the markets. Investor excitement can inflate stock prices. Reopening businesses can spark more optimism.

However, if Doug Kass at Seabreeze Partners is correct, he may be seeing through the hubris. In a recent piece, he directed attention toward another fact:

If you look carefully at the Nasdaq… you would be surprised to see how many stocks have underperformed – as a handful of large stocks coupled with a group of speculative (but valueless) equities have been carrying the weight of the Average.

It’s those “trash stocks” that have the potential to take the wind out of the market recovery and the overall cycle. And this wouldn’t be the first time this has happened.

The 1999-2002 “dot-com boom” is the most recent such instance, filled with examples of overvalued “trash stocks” that eventually left investors hanging.

Which leads us to today…

Those Who Fail to Learn From History Are Doomed to Repeat It

…click on the above link to read the rest of the article…

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