Upgrading At The Top: Why It's Done

On May 14, 2013, David Tepper, head and founder of Appaloosa Management appeared on CNBC and told the world he felt the markets would continue dramatically higher for the rest of the year.

One week later, Goldman Sachs (GS) upgraded its price targets on the S&P 500 for 2013 and 2014. The very next day, the stock market topped as the SPDR S&P 500 ETF Trust (SPY) hit a high of $169.07 before reversing the same day to close at $165.93.

Volume Gave It Away
That reversal was a clear signal of a top in the market because of the volume. The volume surge on that day was the biggest volume in all of 2013. Volume and major reversals coming at an all time high almost always signal a strong pullback on the horizon.

Why Do They Do it?
In early 2008, Goldman Sachs upgraded oil to $200 per barrel. Back then, Oil was trading near $150. Guess what? Oil hasn't breached that price since. Again, Goldman Sachs upgraded an investment vehicle at its exact high, which has been repeated by countless analysts, hedge-fund heads, institutional CEO's and more. So why do the big boys always upgrade things at their exact tops, only to see the bottom fall out?

There are two possible reasons. First, they really are no better than the average investor, getting caught up in the hype of any move. However, if this was true, these institutions would not be raking in billions of Dollars in profits per quarter. The only other possibility is they are using the hype and upgrade to sell into it, knowing the top is at hand.

Dumping Into The Top
These big boys understand economics, they understand hype and emotion, they get paid millions to know the odds and be on the right side of the trade. In that case, the only alternative is to assume these big players upgrade markets or stocks at their highs to get the small investor to buy, thus dumping into it. The small investor, time and time again is left holding the bag. If this is true, it would be the biggest scandal yet to hit Wall Street.

Any investigator can look at every major spike or drop in any market and notice a coinciding upgrade and downgrade. Yet with all these bad calls, institutions continue to rake in billions in profits. Is it any wonder the small investor trusts the markets less and less?

Gareth Soloway
Chief Market Strategist
www.InTheMoneyStocks.com