Don't FOMO Into The Rekt Club
The COVID-19 crisis continues to pressure the labor market.
Last week, an additional 2.1 million Americans filed for unemployment, pushing the real jobless rate to 24%.
That’s the highest number since the Great Depression.
What’s weird about this is that, at the same time, the stock market keeps climbing higher.
The S&P 500 trades 9% higher than where it was one year ago when the unemployment rate was one of the lowest in recorded history.
Talk about an upside-down world.
Of course, there is a reason why investors are so optimistic—they expect things will return to “normal” in no time.
This behavior, however, is nothing unusual. It’s a pattern that has repeated itself throughout history, and it never ended well.
We call it a “bull trap.”
Novice Investors Beware, You're Stepping In A Trap
A bull trap, as the name suggests, is a dangerous phenomenon.
It occurs during the beginning stages of a broader downtrend. After the initial pullback, the market starts rallying again, convincing unsuspecting investors that the danger is over.
Since this happens shortly after the market peaked, buyers are usually those that have missed the prior uptrend and see this as an opportunity to get in at a lower level. After all, prices are back on the rise, and they don’t want to end up on the losing side again. It’s the fear of missing out (FOMO) that’s driving their decisions.
In the meantime, conditions continue to deteriorate, creating an ever-wider gap between the market price and the real picture.
Naturally, this can’t go on forever. Sooner or later, reality pulls the market down, resulting in a sharp and swift decline.
And those investors who bought into the rally, end up with huge losses. Hence the name “bull trap.”
Retail Investors Are Buying Stocks Like Never Before
There is a reason why I’m telling you about this phenomenon today.
As I mentioned in the beginning, the disconnect between stock prices and reality right now is enormous.
Meaning, we’re likely within a bull trap as you read this.
I’m not the only one who thinks like this. Other financial professionals are acting just as defensively.
In fact, when you look at who’s fueling the recent rally, it’s mainly retail investors.
Robinhood Financial, a popular stock-buying app, posted a statistic this month showing that users’ stock positions have doubled since the beginning of March.
I’ve been in this business for a long time, and, so far, I’m yet to see a moment where retail investors are right about the market and financial professionals are wrong.
I don’t think they’re going to be right this time either… which is why I must warn you to be extremely careful with your stock picks at this point.
Navigate The Crisis With This Dividend Stock
Having said all that, I’ve actually found a stock that I like in this market.
It’s a utility company, and, as such, is resilient to economic shocks. Electricity is something people pay for, no matter what.
Moreover, this stock pays a handsome dividend that amounts to a return of about 6% per year. I think you’ll agree that in the current low-yield environment, that’s an impressive number.
I’m going to reveal the name of the company in the next edition of my True Retirement Wealth, which mails out tomorrow.
Good investing,
Leon Wilfan