Market Analysis

The Harbinger

By on • ( 12 Comments )

Record market prices again on Inauguration day as equities continue on the Stretched path.

In a world that is uniformly bullish oriented in the firm belief ( and so far correct belief) that coming inflation, ongoing central bank central bank intervention and further stimulus programs will keep the record asset price inflation machine going I want to offer a little thought experiment: What if everything is the same bubble and if so is there a harbinger of trouble on the horizon?

Firstly some perspectives:

This rally in structure is not unusual, indeed it is following virtually the same script/structure following the Trump election in 2016 with an important caveat however:

Another caveat: Market valuations have again reached never before seen levels of asset price disconnect from the underlying size of the economy: 192.9%

All of this is ignored by participants and seemingly justified by low rates and ongoing interventions, the risk free rate they call it.

Yet despite all the new highs headlines yesterday there are some subtle cracks emerging. Both small caps and $DJIA are struggling to make new highs versus the recent highs:

It may mean nothing, but maybe it means everything, only time will tell, but perhaps the new highs headlines are not what they are cracked up to be.

What is clear that yesterday’s highs were prompted by another big rally in big cap tech inspired again by one of the big $FAANG components: $NFLX. The stock benefitting from everybody sitting at home due to the pandemic and watching TV. Fair enough, but it may be noted that markets have supposedly rallied on vaccine optimism and the re-opening trade. Who’s watching TV in the same amounts when the economy againreopens? Shouldn’t that ultimately impact $NFLX negatively? I know, don’t ask questions, just buy.

Which brings me to the original question: What everything is the same bubble? What do $TSLA and Bitcoin have in common? Nothing really other than vertical price appreciation:

That is until very recently as Bitcoin is suddenly under pressure. What if this sudden price reversal is a harbinger for equities?

Consider:

In a world of everything vertical price appreciation Bitcoin has not disappointed doubling in price from the original peak in 2017.

A few days ago $BTC hit a technical pivot point:

We can note that this pivot has indeed produced a price reaction following a near vertical price move:

A vertical price appreciation not unlike what we saw leading up to the 2017 peak:

Recall that equities then too were in their own vertical move foaming at the mouth about coming tax cuts. Bitcoin peaked in December 2017. Equities peaked one month later at the end of January. The reversal was brutal:

What if Bitcoin itself is a bubble? I know a sacrilege question, but consider that its original purpose, that of a currency, has increasingly taken a lesser role in the marketing of bitcoin as a key asset to invest in, rather the devaluation of the dollar and expectation of continued money printing is ever more cited as the primary reason to invest in bitcoin. Same with equities.

If the narratives for buying are the same, then why not a correlation in price? If everything is linked with and justified by the actions of central bankers then I submit it’s all part of the same trade: Unfalsifiable belief in central bankers to continue to disconnect asset prices from the underlying size of the economy.

So far it continues to work. As we saw in 2018, which saw prices far less disconnected from the economy and charts less disconnected from their moving averages versus now, the incessant optimism was met with a snap correction of size that produced technical reconnects that ended up being a buying opportunity.

This here may turn out the same, and if so, Bitcoin may have been the harbinger to come.

Only time will tell. But as long as the .236 fib holds on the $BTC chart then this reversal may just prove to be another short term pullback, but if doesn’t $BTC may find itself confronted with a much larger corrective risk path ahead, including perhaps a retest of the previous highs of 2017. The implications for equities? Stay tuned.

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Categories: Market Analysis

12 replies »

  1. Typeo. What is clear that yesterday’s highs were prompted by another big rally in big cap tech inspired again by one fo the big $FAANG components

    Reply

  3. Tether is likely to be behind the momentum in bitcoin. Tether is acting like crypto’s Fed Reserve, minting tether coins at an unprecedented pace that correlates with bitcoin’s meteoric rise. Tether is supposed to be backed 1:1 with USD, but no audits have ever been done. Yet, they keep printing it and the cryptomarket takes their word for it. It smells like a scam.

    Reply

  4. ECB today (between the lines): “Whatever it takes!” Means: Infinity.
    Fed: Infinity.
    Stock markets: Ready for running to Mars along with Elon.

    Reply

  5. Easier to be the slowly boiled frog and make money in talisman names tsla, bumcoin, Netflix, spaceships weva than wate time thinking about ‘risk control’ and fed limitations I say! I enjoy coming into here and reading your very well argued points and feelings like some sort of ‘price discovery’ (lol) May return… then I go and get long the little Russell and make bank and get paid. I haven’t read the FT or listened to any of those doubleline round tables on YouTube for ages , and my trading has never been better! I know I might sound trollish but the time for worrying about such things are long past us. Sure we’ll have another 5/10/20% down day, maybe week or two but cmon… double dove fed and treasury !! Throw any sort of caution to the wind and buy the least profitable tech names and Roberts your fathers uncle! Best of luck

    Reply

    • Don’t Hate

      I cant do it…sure have very few equities, Gold, Bitcoin. I see your logic tho. With margin debt higher than the sky any neg catalyst and this is going to become a waterfall. Its different this time, until it isn’t.

      Gl

      Reply

  7. There is a lot of questions on how the new US President will react to seeing new “Top 1%” Wall Street highs every week. If you think the new President is not going to tax and regulate Wall Street into submission, you are in fantasy world right now as just take a look at the cabinet picks that regulate the SEC and banking industry.

    And when you see Bloomberg write entire articles about how the new President can right the wrongs of American capitalism, you know the writing is on the wall and everyone knows at this point that making the rich “richer” is not going to last more than a few more months, and will be reversed sometime in 2021, and most likey in 2022. So enjoy the paper wealth top 1% while you can, as the bottom 99% have 99% more votes than you do.

    Per Bloomberg:

    …the U.S. needs to reclaim the kind of capitalism that existed before the 1980s, when the financialization of American business — and the belief that Wall Street was the only thing that mattered — began.

    Reply

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