Canary In A Coalmine?

I am hoarse from discussing the role that options trading has been playing as a contributing factor to the recent advance in equity markets overall and specifically in stocks like Gamestop (GME) that have gone seemingly mad. This isn’t a complaint – I find the attention both flattering and a key part of my job description – but it has me concerned. When any investment trend gets inordinate notice in the mainstream media as well as the financial press, it usually means that the trend is closer to ending than beginning. 

I offer the following graph as an illustration to what happens when a mania shows signs of abating. I deliberately removed the name of the underlying product and any related price and time clues to enable readers to consider it without prejudice.

Six-month graph of “Product X” with 10, 30, and 50-day moving averages

(Click on image to enlarge)

Six month graph of “Product X” with 10, 30 and 50 day moving averages

Source: Bloomberg

We see that this product had a spectacular rise (roughly fourfold) in a short period of time (about 3 months), far outstripping the moving averages that tended to define its trend. A month after its peak, we see the product giving back over a quarter of its gains, causing its 10-day moving average to cross below its 30-day counterpart, and flirting with a second test of the 50-day moving average that it had far outstripped. 

I wish I could tell you the eventual outcome for this product, but I can’t. As some of you undoubtedly guessed, this is a 6-month chart of Bitcoin from about 11:00 AM Eastern time today. When the cryptocurrency had a dizzying rise from around $10,000 to over $40,000 around the close of 2020, media coverage of its gains became an ever-increasing fixture in the financial and mainstream press. Ask yourself how much you have seen or heard about Bitcoin in the past couple of weeks relative to what you experienced during its rise. Unless you’re a dedicated crypto investor, the answer should be “not as much.”The focus has moved to options activity, stocks having seemingly incomprehensible moves that originated as short squeezes, or a combination of the two.

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Trading in Bitcoin futures is especially risky and is only for clients with a high risk tolerance and the financial ability to sustain losses. More ...

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