The Signs of a Market Top?

The following is a theory that I told the guy who cuts my hair a few years ago.

As a contrarian, I believe the market likes to do the opposite thing that most people expect or think is sure to happen. If it didn't, all day traders would be filthy rich by now.

Answers.com: Day Trader

A 2000 study by the North American Securities Administrators Association, quoted in Forbes, found that "77 percent of day traders lose money. And of those who did profit, the average was just $22,000 over the space of eight months. Of the 124 accounts surveyed, only two—people, not percent—netted $100,000 or better. The highest was $160,000." And that was at a time (1998-1999) when the stock market was soaring. Now that it has come back down, there is even less money being made.

So here's the theory.

Bull markets are started when bad news drives stocks higher. At some point the never ending bad news exhausts all sellers and the investors who are left become desensitized to any further bad news. Once the selling stops, the market can rise. The market's rise eventually leads to higher investor confidence and therefore turns into a virtuous upward spiral.

Similarly...

Bear markets are started when good news drives drives stocks lower. At some point the never ending good news exhausts all buyers and the investors who are left become desensitized to any further good news. Once the buying stops, the market can fall. The market's fall eventually leads to lower investor confidence and therefore turns into a vicious downward spiral.

So what did we see today? I turned on the TV this morning and the bulls assured me that the market would in fact have to go up. The Microsoft and Amazon numbers were completely unexpected and would propel the market to higher highs. For all intents and purposes, it was a SURE THING!

What did we actually get though? As I look at the intraday chart of the stock market today I see that we had about 30 minutes of bull market and then the buyers completely and utterly dried up. Even Amazon's 25% increase in stock price could not support the market overall.

The following question was asked repeatedly on CNBC today. Would Amazon's numbers be enough to save the economy? I laugh at the very thought and for a reason you might not suspect.

There are 300+ million people in this country. According to Yahoo's profile of Amazon, there are just 20,700 employees working at Amazon.

Amazon's Early Holiday Cheer

On Oct. 22, Amazon said third-quarter net income surged 68%, to $199 million, while revenue jumped 28%, to $5.45 billion, compared with Wall Street's estimate of $5 billion.

That's roughly $260,000 in revenue per employee in just one quarter. It's a productivity miracle. Why should this be concerning? Let me put it this way. When I order something from Amazon.com I don't actually need to talk to an employee. Amazon.com therefore needs fewer employees than most retailers would. Fewer employees means fewer jobs. With unemployment at 10% and rising, fewer jobs means... big problems ahead.

Let's put this in perspective.

2,100,000 employees work at Wal-Mart.
351,000 employees work at Target.
324,000 employees work at Sears.
167,000 employees work at Macy's.
147,000 employees work at J.C. Penney.

Just 20,700 employees work at Amazon.com though.

BLS: Retail Salespersons

Employment is expected to grow by 12 percent over the 2006-16 decade, which is about as fast as the average for all occupations. In fact, due to the size of this occupation, retail salespersons will have one of the largest numbers of new jobs arise, about 557,000 over the projections decade. This growth reflects rising retail sales stemming from a growing population. Many retail establishments will continue to expand in size and number, leading to new retail sales positions. Since retail salespeople must be available to assist customers in person, this is not an occupation that will suffer negative effects from advancements in technology. To the contrary, software that integrates purchase transactions, inventory management, and purchasing has greatly changed retailing, but retail salespersons continue to be essential in dealing with customers. There will also be an increased demand for retail salespersons in warehouse clubs and supercenters, which sell a wide assortment of goods at low prices, since they continue to grow as many consumers prefer these stores.

Despite the growing popularity of electronic commerce, the impact of electronic commerce on employment of retail salespersons is expected to be minimal. Internet sales have not decreased the need for retail salespersons. Retail stores commonly use an online presence to complement their in-store sales; there are a limited number of Internet-only apparel and specialty stores. Retail salespersons will remain important in assuring customers, providing specialized service, and increasing customer satisfaction. Most shoppers continue to prefer to make their purchases in stores, and growth of retail sales will continue to generate employment growth in various retail establishments.

They can't be serious. Let's look at the actual numbers again using a crude back of envelope calculation.

In 2008, Amazon's 20,700 employees generated roughly $19 billion in sales.

In 2008, J.C. Penney's 147,000 employees generated roughly $19 billion in sales.

Amazon.com was able to generate the exact same sales with 1/7th the number of employees. So what is going to happen to the overall retail sales employment picture as Amazon.com continues to grow? Does it really take a great leap of faith to realize that retail sales employment will struggle going forward?