Warning Light Flashing Red

A fourth factor to keep in mind is the narrowing of the speculative universe into a few assets. This creates an extreme dependency on the few rocketships to keep soaring lest the entire ETF / index fund world collapse.

A fifth factor to keep in mind is the potential for the Covid virus to spread globally beyond current expectations. Such an expansion could trigger a global slowdown/recession.

A sixth point to keep in mind is that all fiscal and monetary stimulus suffers from diminishing returns. (see chart below) The chart of money velocity suggests the returns have fallen off a cliff. (see chart below)

A seventh factor is the dominance of algorithm-driven trading (algos, trading bots, etc., which appears to be mostly programmed to be momentum / trend-following. If these programs are withdrawn to avoid high volatility, the liquidity the market depends on to maintain stability may dry up, increasing the odds of the market going bidless, i.e. buyers vanish and prices crash.

When the warning light is flashing red, it's prudent to have a capital preservation strategy in place.

 

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Disclosures: None.

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