Have you ever successfully slapped an annoying fly?
One that’s taken a brief pause from pissing you off to snack on your delicious lunch?
I was once told, and perhaps you’ve heard this, that you have to move in for the kill very slowly to get close, and then lash it from a few inches away.
This, folklore tells me, is because their eyes are only capable of picking up faster movements. Slow movements don’t register, and so you can get close.
This reminds me of two things.
Firstly the famous quote from Hemingway, replying to the question, how did you go bankrupt? “Slowly, and then all at once.”
Secondly, it reminds me of the arrival of coronavirus in March this year.
We had all been reading about it for a month or more.
We looked on with wonder at the incredible images and footage from Wuhan and beyond, of people being barred into their homes, empty streets being gassed, and cities being locked in.
And even in Italy, when we saw lockdowns being imposed, queues becoming normal outside shops, and surging numbers of cases, we weren’t worried.
It’s incredible, looking back, how blasé we were.
Now it feels to me as though the same is happening with the economy.
I should insert here the usual caveat that the rampant stockmarket is only really in the US, and only really in tech, and only really in a few main stocks – your Facebooks, Teslas, Apples, and the rest.
But still, I sometimes just sit and feel as though I’m standing on a beach, watching the tsunami come closer.
The initial pullback of the water has been matched by an even more powerful resurgence, and everyone is just watching, cheering.
We’ve survived the initial surge, but the bigger one hasn’t hit yet. The dust hasn’t settled. People are still being paid by the government; tenants haven’t been kicked out of their homes.
And like the fly that (possibly) doesn’t register slow movements until it’s too late, we might be about to get crushed.
And as the doom-laden hands creeps closer… some stocks are surging?
The rally that many commentators, myself included, were surprised about has split off, like a rocket that discards its boosters after the first minute or two.
Now the rally in major markets is centered around big tech in the US.
What should we do about it? Should we watch on in horror, or get involved?
George Soros said, “When I see a bubble, I buy it.” It’s possible he’s right, and that this is just getting going.
And my imagination tells me that the tech boom around 2000 was a lot wilder than this, so perhaps there is room to run.
At least Apple is a phenomenal company turning out bits of kit that are the most desired phones and laptops in the world, for lots of people.
They say no smoke without fire, and in the case of the wilder stock runs of 2020 this is true. Although prices have got a bit far out, the likes of Facebook, Apple, Tesla and Amazon truly are the most incredible companies of the decade.
There is a pretty grain of truth at the bottom of these bubbles, and it’s worth remembering that before we dismiss the high valuations.
What’s more, Dominic Frisby told me during our recent crypto summit that his definition for a bubble is “a bull market in which you don’t have a position”.
And don’t forget, Warren Buffett’s largest position is still Apple.
There are plenty of reasons to be sticking with this rally.
Having said that, my firm belief is that it will end in tears. What I fear is contagion – that collapsing market darlings will take whole indices down with them, even ones which haven’t participated in the rally.
My preference as a long-term investor is to play no part in this run – it’s just not worth it.
But I’ll concede that the most common follow up to market madness is market insanity.
And just because something is overvalued, even wildly so, doesn’t mean it’s going to go down tomorrow.
But for me the key thing is that if you are buying at elevated levels, it takes not one but two decisions – buying now and selling before it’s too late. And that’s tough.
Remember, when Amazon toppled from its peak in 2001, it fell 90% and didn’t regain its ground for a decade or so. The Nasdaq could ruin your life if you hang on too long.
So if you are participating in this amazing rally, you need to make sure you don’t ride the rollercoaster all the way down.
And if you’re looking to get in now, you have to back yourself to buy when there’s room left to run, and then also sell before it’s all over.
I don’t fancy those odds.
It’s like that “cash-out” option on betting websites – I reckon they’re just a second opportunity to give the betting company your money. You know the market is rigged against you, so why give them a second chance to fob you off?
In the same way, it’s hard enough getting one call right, but completing a trade, in and out, in such volatile times is really tough.
That doesn’t mean you’ll definitely lose money, but just be careful out there is all I’m saying.
So yesterday, the US markets crashed on open. No particular reason why, that I could tell.
I was listening to Grant Williams’ latest podcast series, and his colleague Bill Fleckenstein commented that he believed bubbles die of exhaustion.
Perhaps it’s just that.
Anyway, one indicator would have given you an early warning, and not for the first time.
Bitcoin, as an asset, is a high-risk asset that’s rather volatile, and as such is quite often the first to register big moves out of risky assets.
Here’s the last week, with the bitcoin price in USD in orange, and the Nasdaq’s daily trading hours in blue. Bitcoin trades 24/7 hence why the Nasdaq isn’t a complete line.
Since Tuesday night, bitcoin has been telling us that something’s wrong. Might be worth watching in the future.
There are other interesting technical reasons to be fearful in the short term. I don’t place too much faith in them – they’re mostly for fun. But people do and that gives them some weight.
Here’s the first, a technical “formation”. The idea is widening lines of price resistance, and the suggestion is that if the formation is to hold, the S&P has pretty much maxed out its current rally.
Source: Sven Henrich on Twitter
What’s more, the VIX index which tracks expected volatility (fear), has been rising for the last week even though markets have been rising. This goes against the norm, as rising markets usually make investors feel more relaxed about the future, not less.
And finally, our man Tavi shared this earlier this week.
Source: Tavi Costa on Twitter
So if you want to jump on the dip from yesterday that’s okay. There might be some quick money to me made. One last squeeze of juice from the lemon.
But don’t bet the house on it, as the Nasdaq will be ruining lives again before too long. Perhaps when the markets start reacting to the economic “first wave”.
Editor, UK Uncensored