Turn on CNBC, and you will notice a bright green box permanently affixed to the bottom right corner with the ever-changing price of Bitcoin. Bitcoin is all the rage as market speculation across crypto and other assets is robust. Moreover, with Donald Trump putting Bitcoin-friendly appointees in key financial regulatory jobs, the price surge has some fundamental basis. The breaking of 100k on Wednesday night will further fuel the price. Markets frequently gravitate to round numbers. Therefore,100k is an important milestone that should fuel more buying. For now, 100k and the additional speculation it generates will provide a base for the price. However, the rally in Bitcoin is getting overbought and could likely be in for a consolidation or decline soon.
The graph below shows the recent price spurt to get over 100k. In March 2024, Bitcoin had a similar surge, which pushed prices to overbought levels. The current MACD is slightly higher than in March, as highlighted in the circle. Furthermore, despite the excellent price action and eclipsing 100k, it appears to trigger a sell signal. Bitcoin will likely consolidate, but the big question is when and, equally importantly, how much higher it will go before taking a breather.
What To Watch Today
Earnings
- No Earnings Releases Today
Economy
Market Trading Update
In yesterday's discussion, we laid out the market's historical performance during the second and third weeks of December as mutual funds make annual distributions and rebalance portfolios. While we expect any pullbacks to be mild, there is an unappreciated risk that a correction in equity prices could be larger. As we head into year-end, any portfolio manager that runs a balanced portfolio of stocks and bonds will need to rebalance. As shown in the chart below, the appreciation in stocks has been significant this year, while bonds have dragged, suggesting that fund managers are likely heavily overweight stocks and underweight bonds.
Historically, the stock/bond ratio remained in a range between roughly 1:1 to 2.5:1. Today, that ratio has skyrocketed since the flood of liquidity following the pandemic as money chased risk assets over safety. At a ratio of 6.5:1, we suspect that, at some point, a reversion will take place. In the short term, given the outsized performance of stocks versus bonds in 2024, there is likely an unappreciated risk that portfolio rebalancing by managers could add a layer of selling pressure over the next couple of weeks.
While we certainly cannot discount the more extreme bullishness in the markets that could keep prices elevated, there seems to be very little harm in managing risk exposures between today and the end of the year.
Stock Versus Bonds
Many investors hold diversified portfolios, including stocks and bonds. Accordingly, actively managing the allocation between stocks and bonds can be fruitful for active investors.
Currently, the price ratio between stocks and bonds is at an extreme level. Such is not surprising given that investor sentiment clearly leans toward higher stock prices and lower bond prices. The graph below, courtesy of Callum Thomas and @i3_invest, shows that the price ratio of the S&P 500 (SPY) and long-term Treasury bonds (TLT) have been in a well-defined channel for the last twenty years. Contrarian investors, willing to go against popular sentiment, are indeed aware of the situation and licking their chops.
Even if you are a diehard contrarian investor, relying solely on the graph below is not a reason to shift allocations to bonds from stocks. As experienced in 2003-2006, the price ratio can ride along the upper channel line. Such could easily be the case again for the next few years. However, when the macroeconomic environment changes and the Fed starts aggressively cutting rates, those allocating between stocks and bonds should be mindful that bonds can significantly outperform stocks in the short run.
We remind you of a few of Bob Farrell’s investment rules to emphasize the graph's importance.
- Markets tend to return to the mean over time.
- Excess moves in one direction will lead to an excess move in the opposite direction.
- When all the experts and forecasts agree, something else is going to happen.
Another Market Warning
Over the last few weeks, we have shared evidence that markets are becoming very speculative. Similar to our lead thoughts on Bitcoin eclipsing 100k, speculation can drive speculation. While the circular feeding frenzy can continue for a while, we must be aware that when prices grow much faster than their fundamental basis, they become unstable.
The graph below, courtesy of Sentimentrader, is another example of speculative fever. It shows the ratio of leveraged long ETFs to short ETFs is surging to its highest level in five years. There is now approximately $14 invested in leveraged long ETFs to every dollar in a short ETF. The ratio has grown by over 50% in just the last month.
Tweet of the Day
“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.”
Please subscribe to the daily commentary to receive these updates every morning before the opening bell.
If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.
The post 100k Bitcoin appeared first on RIA.
Full story here Are you the author?You Might Also Like
The Dollar And Oil Foresee A Santa Rally For Bonds
2024-12-04
Bond yields are primarily driven by macroeconomic factors such as inflation and economic growth. Given their impact on inflation and the economy, the U.S. dollar and oil prices are frequently well correlated with bond yields. Therefore, bond traders often take their cue from the dollar and oil markets. The dollar (blue), as graphed on the …
AI Is Steaming To Nvidia’s Benefit
2024-11-22
Wall Street’s poster child for AI is Nvidia. With an overwhelming market share in AI chip design, Nvidia is up over 200% year to date and a whopping 2680% over the last five years. Driving the price surge are incredible earnings, revenue growth, massive profit margins, and promising outlooks. Since 2020, Nvidia’s sales have increased …
Seeking Beta
2024-11-13
While the “Trump rally” appears to have just begun, one of its initial hallmarks is that investors want beta. Beta is a measure of the volatility of a stock versus the broader market, most often the S&P 500. For instance, a stock with a beta of 1.50 implies that based on prior trading, investors should …
De-dollarization Or Re-dollarization?
2024-11-06
Some gold and Bitcoin bugs claim the U.S. dollar is being inflated away and that our politicians and the Fed are abusing its status as the world’s reserve currency. While the narrative may sound logical, the fact of the matter is that the opposite is occurring. Despite growing de-dollarization narratives in traditional and social media, …
Will Halloween Fear Bring November Cheer For Bondholders?
2024-10-31
The last two Halloweens capped off a few frightful months for bondholders. However, as we share below, 10-year bond yields reversed course on Halloween in 2022 and 2023. Will 2024’s harrowing October for bondholders end with Halloween’s ghosts and goblins? Accordingly, will November be better for bonds as it has been for the last two …
Memory Inflation Warps Bond Yields
2024-10-23
The Mayo Clinic defines Post Traumatic Stress Disorder, or PTSD, as “a mental health condition that’s caused by an extremely stressful or terrifying event — either being part of it or witnessing it.” Within the field of PTSD research is a concept called “memory inflation.” Memory inflation occurs when memories of traumatic events become more intense over time.
Memory inflation of past events amplifies one’s emotions and behaviors. As we will discuss, distress from recent price inflation is causing many investors to overly fear that a similar situation will reoccur.
Given the tight relationship between inflation and bond yields, memory inflation negatively affects bond prices. Additionally, memory inflation may prevent some investors from seeing an opportunity to profit from the
The VIX And Market Climb: Should We Care?
2024-10-16
The financial media frequently opines on what the daily gyrations of the VIX (implied volatility index) signal regarding investor sentiment. Despite how often it is quoted and discussed, many investors do not truly appreciate what implied volatility measures.
We take this opportunity to help you better understand implied volatility. Furthermore, we discuss other lesser-followed measures of implied volatility that help better assess whether implied VIX readings infer bullish or bearish sentiment.
The timing of this article is essential as the VIX has been rising alongside the market in a non-typical fashion. With the presidential election in a few weeks, the Fed changing course on monetary policy, and Israel potentially attacking Iranian oil facilities, the increasing level of
A Crystal Ball Isnt Enough: The Importance Of Context
2024-10-02
On September 18, 2024, the headlines read the Fed cut the Fed Funds rate by 50 basis points. At first blush, one would think that a trader with a crystal ball a couple of days before the Fed action would buy bonds and lick their chops over the money they would soon make. In this case, the crystal ball was a curse.
Bond yields rose following the rate cut despite what many investment professionals perceive to be a bullish event. If you scour the media, you will find rationales for the sell-off. Such includes the Fed stoking inflation or China’s massive stimulus package. In our opinion, it’s much more straightforward; it all comes down to context.
We were inspired to write this by a message asking us in disbelief if we had ever seen such an adverse bond market reaction to a rate cut.
Tags: Featured,newsletter
