The bull market that was born in 2009 is now about 9 years old. It’s been a historic run but here I’ll explain why I think we’re a few weeks to a few months from the top.
In the following report, Jeremy Grantham examines various historic bull market tops looking for clues as to when this bull market might top out. You can read his examination yourself here:
Bracing Yourself for a Possible Near-Term Melt-Up
Jeremy Grantham
The section I’d like to highlight is on pages 6-7 where Grantham points out the divergence that occurred between the S&P 500 and the tech stocks in 2000. Basically the internet tech stocks started to crash in early 2000 and yet the broader S&P 500 didn’t itself break down until months later. The tech stock bubble pop was a timely warning for the end of the larger S&P 500 bull market. Or perhaps another way to look at it was the rationality that eventually broke through the internet euphoria was contagious.
Back to today, we’re experiencing our own bit of history. In particular I think the cryptocurrency bubble has popped. Cryptos have been positively slaughtered the last few days. I don’t think it’s the end of cryptocurrency, just like the tech crash of 2000 wasn’t the end of the internet, but it probably is the end of the crypto bubble for now. And no doubt many of the more questionable cryptos won’t survive.
And finally, as you might suspect, I’m drawing a parallel between the tech stocks of 2000 and the cryptos of today, and suggesting the rationality now appearing so violently in the crypto market will soon migrate to the equity bull market. Maybe there will be a multi-month lag like there was in 2000, or maybe the timing will be different. Either way I think the fuse is lit and the market will soon top. If the more speculative bubbles go down first followed by the lesser bubbles, I think we’re being given a timely warning. No doubt making any protective moves today would be early and miss some upside, but I suspect in hindsight it would turn out to be a wise decision.
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Interesting read. Thanks for this.
I don’t think cryptos are nearly as widespread as tech stocks were. However I do agree with the general analysis. Couple all these signs with central banks pulling the punch bowl away (finally!) and I would say something should finally break before mid-end 2019.
Market indexes are starting to look more parabolic, which I would think would be another sign.
But of course, markets can remain irrational longer than you can remain solvent, so I never try to time anything!
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It’s not the size of the crypto market that is the issue IMO. It’s just an initial indicator of the general investing population become more risk adverse. That aversion to risk starts at the fringes and moves to the core. Crypto is a fringe, S&P 500 is the core. It’s a signal that status-quo is changing.
Thank you very much for the information. Very interesting its analysis and its historical comparison. However, empirical evidence shows that in these markets, history repeats itself … but in different ways.
The stock market is expensive with any indicator that tries to measure this aspect.
However, we do not know when the correction will begin. We also do not know what its magnitude will be.
As always, it is best to follow a strategy that shows good long-term results. Personally, I am very suspicious of risk control mechanisms such as “Stop Loss”.
I’m not claiming to know when the market will correct. I’m observing the market is now starting to pop bubbles in smaller markets (unless crypto somehow manages to recover). And I’m speculating that market mood might be contagious as it was in 2000. Do with that what you will.
Interesting, you have been trading for 21 years and you are only "suspicious of risk control mechanisms such as “Stop Loss” One would think by now you should know one way or the other. Stop losses are like any other aspect of trading, we have learned to be successful at it or we have not. So you hedge potential losses?
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Where does the unemployment rate fit into this scenario?
4% unemployment, people feeding 401k’s…
Does the market go first THEN people start losing jobs?
This is the sixth Bitcoin correction of thirty percent or more. So why should this one matter more than the rest?
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Typically (last 2 recessions) unemployment went flat and slightly ticked up as the market hit peak. The market then led the way, bottoming before unemployment peaked.
The crypto market is much bigger and much more visible now than anytime in the past. CNBC talks about it constantly just like they talked about tech stocks nonstop in 2000. A big drop here in crypto will be significant to speculative spirits. Meanwhile the equity market is a bubble looking for a pin.
Note that none of this speculation changes my system strategy though. That’s a benefit of having a strategy and being systematic.
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David, you’re right about the tremors that bitcoin is sending. I see two issues with bitcoin. It can be exchanged peer-to-peer without the need for a trusted intermediary, and it lets transactions be anonymous. It essentially resembles physical cash, but with no central bank controlling its value, Bitcoin is a liability of nobody. Thus, there’s nothing to stop its value from falling to zero. I see that unless it stops being so wild, people will see it more as a security than a reliable means of saving and exchange. I predict government will regulate the daylights out of it with all the same SEC caveats we see with securities, essentially defeating the underlying purpose of bitcoin. Will be interesting to watch. For me, if I can’t model it, I don’t trade it!
The reasons you’re concerned about bitcoin are the reasons I first bought it back in 2012. What you see as negatives I saw as reasons why it would be big (and apparently so did the market). The reason I’m concerned about bitcoin lately is because development has been taken over by economic illiterates, and they’ve derailed bitcoin from the fundamentals that you describe. Bitcoin barely functions today with big delays and high fees precisely because the current dev group has derailed it from its original vision.
David, you are absolutely right. And, you were smart to buy (I know with speculative money). Unfortunately, as bitcoin matures, it will have to deal with the least common denominator of players. That includes the economic illiterates and politicians.
As an interesting aside - and I think this is in your wheelhouse - some of my graduate work was in quantum mechanics. Something that is NOT on radar screens right now as it relates to bitcoin is what happens when quantum computers become a reality. I guess it is part of growing up process, but I think it is a big unknown for cryptos in general. Check this out:
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Yes, the quantum threat was talked about even back in 2012 and ealier. The standard reply was bitcoin is an open source, multi-dev-team project that would adapt to issues like quantum computing as they became issues. Unfortunately the current dev group that took power chased out the other devs and has taken the stance of no upgrades to bitcoin. That stance has not only led to its scaling problems with high fees and delays, but also leaves the quantum issue unsolved. IMO bitcoin is a stagnant dead-end and has no business being the leading crypto. But the good news is there are other cryptos that are more advanced, with better dev teams, and much more promise. I suspect in 2018 bitcoin will continue losing its leader status to several of those coins. Bitcoin’s fall has been happening rapidly since that bonehead dev team took over. You can see the rapid loss of bitcoin’s marketshare here at the below link. That’s the story the media is only starting to pick up.
The real question is can bitcoin fail gracefully without dragging down the rest of the crypto market? With the drop in cryptos the last couple days I wasn’t so sure. There’s a bounce now, but it might just be a bear market bounce.
mmm… Very interesting. I think you’re right on in your assessment.
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Very interesting analysis (as usual). So which crypto-currencies do you like better?
Bitcoin forked back in August into Bitcoin and Bitcoin Cash. The fork was done in response to the boneheaded direction bitcoin devs were taking. Those that forked Bitcoin Cash are trying to keep it in the original vision of Bitcoin. So IMO Bitcoin Cash is the real bitcoin, and it has scaled so it’s quick and inexpensive and can still be used for use cases like payments. While bitcoin is losing business relationships, Bitcoin Cash is adding them (usually by businesses switching from bitcoin to bitcoin cash). So I like bitcoin cash over bitcoin.
However I think this year and into next will be the time for Ethereum to shine. Ethereum is newer tech, developing at a fast rate with a larger group of dev teams, and is about to roll out several upgrades this year that will be ground-breaking for crypto in scaling and switching from proof of work to proof of stake (which solves the electricity usage issue bitcoin has). It already has more use cases than other coins and is doing more transactions and actual work than all other cryptos combined. My largest position is in Ethereum and it’s my pick to displace Bitcoin for lead crypto with the biggest marketshare/marketcap.
There are a lot of interesting small coins, but I see them as highly speculative. It’s difficult to know which might actually make it past initial stages. Nimble traders perhaps can make money off them as they have huge volatility… but I don’t play in that area.
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David,
Thanks. I am personally holding only a very small position (a few thousand dollars) in crypto-currencies, but (given your comments) I’m happy to say that my largest position is in Ethereum. In my own account, I have been trading somewhat larger chunks of GBTC (Bitcoin trust) for awhile, so far successfully, but I am not holding GBTC as an investment.
I started 2 bitcoin related strategies here at C2 last month. They are both up over 90% so far, even though the price of GBTC has fallen by 50% since I started them.
Right now I’m just nibbling until my main indicator turns positive again. My main indicator was positive from Oct. 30 through Dec. 19 (when GBTC went up 4-fold from 726 to 3020). Then it turned negative (down from 3020 to about 1800. Certainly, it’s going to be a wild ride.
Unfortunately, I haven’t found good tradable ETNs for Etherium yet.
Thanks again for your wisdom and experience.
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Thanks and good luck with those systems. I think there is an Ethereum ETN on the stolkholm exchange, but its priced in SEK. I hear there will be Ethereum futures and ETNs in the US soon anyway.
I think the Etherium trust is run by the same people as the Bitcoin trust, but it doesn’t trade on the exchange like GBTC, but that info was a few weeks ago, so it may be stale. I’ll check.
