Its not just Bitcoin…

It is only a day into 2018 and already the markets are creating some possible backdraft.   Bitcoin has already dropped today from its recent high.   Surprised?  We are sure you aren’t.    There is no secret the monumental rise of Bitcoin’s price has created a feeding frenzy that is not set in reality.   Little is known or understood about cryptocurrency as a whole let alone the high flying Bitcoin.

Individual investors have bet the ranch on Bitcoin and/or cyrptocurrencies becoming mainstream.   Multiple investors have bought into an upward trend that is not reality, as the actual value is not rooted in anything concrete.   Therefore, the illusion has become reality and soon enough there may very well be a moment of reckoning.

What is even more disturbing according to some economists is the continuous rise of the overall stock market.  You would have to be stuck on an island with no internet to not know the stock market has risen significantly over the past twelve to fourteen months. On the average most ten year cycles of markets are positive at least sixty percent of the time. So in a ten year cycle that translates to six or more years of upward growth and momentum.   At this point we have passed that point in this current cycle.

As the markets are following this trend coming into 2018 some market pundits are stating there will be an overall correction. Which if we peel back the layers of the market onion does make rational sense.  Since the overall market is a future indicator, it would make sense that since values are extremely high right now, some pull back is inevitable.  If history is any teacher than we know that markets cannot sustain price levels without some adjustment.

If one looks at the technical charts equities in the United States have rallied for consecutive months without a sign of a correction.  These type of upward trends are extremely unusual in any market segment.  Since the mid 1940’s there have only been several times this has occurred.    If we follow the data over a period of time normal corrections built into the risk adjusted returns for the market are anywhere from 5% to 12%.

During this period of upward market mobility most investors are not mindful of the continued volatility inherent in such a market.  The lack of overall correlation to a normal market has most investors blinded by continued price moves to the upside.  Only those professionals that are experienced and have seen trends resembling this before are prepared for a correction.   What everyone needs to keep in mind is that a lack of volatitly does not mean there is a lack of risk.

As many market experts fear, the continued push of price to earnings ratios on most companies needs time to take a much needed breather.   Too much risk is being taken as prices increase with no fundamental rational.   So it would seem that the stock market as a future indicator is shall we say not operating on the proper structure.   As we may soon come to see the market could deteriorate and correct somewhat or more significantly.

Individual investors need to be focused on the overall value proposition that the market represents in order to make fundamental investment decisions.   Remember, just like Bitcoin.  What goes up almost always comes down.

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