The collision of global markets and social mood

Thursday, April 11, 2013

Bitcoin And Social Mood

The digital crypto-currency Bitcoin blew up yesterday, imploding from $266 to $105. Notice the decline is 60.53%, very close to a Fibonacci 61.8.

There will be many arguments as to why the crash occurred so suddenly, but few will make the connection to the vagaries of social mood. It was a bubble, and psychology simply took over.

It's happened before (with tulips of all things). It will happen again.

This is a chart of the South China Sea company.

There were no denial of service attacks on tulips or the shares of the company that was surely going to conquer the world back in the 1700s. There was no Federal Reserve. There was just human nature.

Bitcoin is an anonymous digital currency not subject to government jurisdiction, capital controls, or inflation. Personally I hope there are more like it.

I find it amazing that so many people criticized Bitcoin, especially traders. True, it was in bubble territory. But no one (except for Steve Hochberg at Elliott Wave International) seems to be making the connection to social mood -- what if Bitcoin is a proxy for speculative fever? Could it be signalling a coming change in speculative appetite?

Most will say it hit bubble territory because of a flight to safety, because of Cyprus. It went up simply because of a shared mental state that its price would continue to rise.

Quite possibly the Dow and the S&P are beneficiaries of the same mental state.

Individual investors -- who have largely not participated in the market since 2009 -- are quite bearish as measured by the latest AAII readings. Professional investors, as measured by COT and Daily Sentiment Index readings, are quite bullish, with large speculators close to the longest they've ever been in the NASDAQ. Even Stocktwits' own sentiment readings are 56% bullish on the S&P.

My take has been that we've been in a bifurcated market since 2000. The S&P has been rallying since 2009 but doing so in the context of a possible 13-year topping pattern. Simply put we're in a five-year bull phase inside a 13-year bear phase. The cross currents are everywhere.

I take the Bitcoin crash seriously. The S&P did not. The only good thing that happened yesterday was that I got out of all of my SPY 156 and 157 calls at a premium (I thought these were doomed back on April 3rd) and then was rewarded for a four-hour stint at the Petro Truck Stop in Scranton, PA with a small afternoon decline that allowed me to hedge the 157 puts I bought earlier in the day (now down 34%) using 159 calls. The rally that followed allowed me to take some off at a profit and leave some runners.

What I didn't do was compound my problem once it was apparent that I was wrong yesterday morning. I didn't like having to drive for 1 1/2 hours knowing I was wrong, but by the time I got to the truck stop and had some hand-carved roast beef from the biggest haunch of beef I'd ever seen (seriously), I settled in for some work.

The first thing I noticed was that the A/Ds, which have been pitifully weak, were incredibly strong. So my work consisted of doing nothing except for feeling the market's rhythm. When I got the chance to get long I took it.

Today I could see another small thrust higher then a partial retrace. 1567.97 should be viewed as a stop. Because if this wave is as extended as I think it is, the words partial retrace would be amusing. However, after such a strong move, it usually takes a day or two to digest.

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