What’s That Crashing Noise?

Attention spans get shorter and shorter it seems. The 24 hour news cycle seems to have gotten whittled down to a 24 minute news cycle. Once in a while though, a story has a great deal of impact and is referred to as an example of ‘something’ over the long term. This goes back in my memory to at least Watergate. Think about it. The scandal that enveloped the Nixon administration and led to his resignation is known by the name of a hotel in Washington D.C. at the time. The Watergate Break-In is now just “Watergate” and refers to more than just a break-in. There’s a plethora of ‘gates’ after that one, even deflate-gate when the entire football world was in a tizzy over a couple of psi of air in a ball.

Now in the markets we’ve had ‘crashes’ since 1929. And more recently, we’ve had “Flash Crash” added to the lexicon. It was just used again in the Ethereum market, so I guess now flash crash is up there with anything “-gate.” And as soon as it happened the cry was this is the end of the Ethereum market and all the other crypto-currencies with it. See what a bubble it was? Etc, etc…

Ethereum with text

Ethereum is working its way back up. And any flash crash is immediately followed by a bounce as violent as the drop. I guess that’s part of the definition, though since it’s a new phrase still finding its footing, that part may still be up for interpretation. The fact that we are applying a newly accepted term like flash crash implies, to me at least, that the market in question is not “over.” When there was a crash in 1929, I don’t think that people were immediately terming it that. “End of the stock market” is probably closer to what was thought at the time. The term crash would have been a more hind sighted expression. After the dust settled. No doubt before the market recovered, but probably not a coined phrase the next day either.

When it happened in 1987, “crash” was the term used to compare the two events. And when the “flash crash” happened in Ethereum last week, the expression was used to compare it to the flash crash in equities in 2010. Hind sight. We’ve seen this before. All of those equity indices are still around. Thriving, even. It wasn’t the end of the stock market back then, it’s not the end of Ethereum now. These markets find a bid. Buyers emerge. That means that the markets in question will continue as there are still people that think there is value to be had.

This move in Ethereum (and in turn other crypto-currencies) was actually a pleasant “coincidence” of timing in my mind. Now the move itself was attributed to a “multi-million dollar” sell order hitting the market all at once. A “fat finger” order was one of the suspected causes, i.e. someone putting in an order larger than they intended. Like with an extra 0 on the end of an order…Selling 10,000 instead of 1,000 is a prime example. Maybe that is what happened. Fat finger is another term that was invented for errors or occurrences in our standard, regulated markets…and the fact that we recognize the expression means it was not a one-time only event.

The pleasant coincidence is that the market needed a catalyst for a large correction. Not that large, but the fact that it has not fully regained the lost ground means it definitely had a real impact. Whew! Needed that. The last couple of week’s financial news has had an amazing number of mentions and articles about the run-up in Bitcoin and Ethereum. Everyone wants to get in on this get rich quick trade. No downside. Like buying NASDAQ stocks in 1999. And people call them bubbles along the way. But the money chasing easy money pours in anyway. And then much of it vanishes. People gambling and losing money because they never thought they’d lose the money.

So the “weak longs,” as they’re often known, get into the market and quickly chased out. They are not buying Bitcoin or Ethereum with any long term opinion. In fact, many don’t even know what they are buying. But if other people were making quick money, they wanted in. And got what they deserved. Cruel? Don’t kick someone when they’re down? Well, none of this is easy. It’s not supposed to be. Buying a parabolic move in anything generally skews the risk to a level not worth trading. And if you do buy one of those moves, it should always be with an understanding that reversals happen quickly and violently in such markets, so buy for the long term or not at all…and be prepared for some pain.

The point I’m making is that crypto-currency markets are much like other markets. Young ones are very thinly traded, people get rich or go broke in short periods, and the moves they make are the same ones made by traditional instruments when they were newer to market. The idea of regulated markets would do much to change the trading of these instruments. I believe it would quell a fair amount of the volatility they experience, like an old pink sheet stock becoming listed on an exchange. In the end they will trade as instruments across all asset classes find a way to trade from time to time. Unpredictably. Charts or fundamentals, unpredictability is what happens at some point and drives prices in ways we can’t believe have ever happened before. Until we remember that there was even a name invented for it one of those times it did.

What Do You Really Think?

As we’ve gone through these ‘chapters’ I’ve avoided the elephant in the room. That elephant is Washington D.C. Almost as much drama as a 15 year old daughter. And yet we make new highs in equity indices like it’s all sunshine and roses. And the VIX?…Oh, the VIX. How low can you go?

I’ve been trying to figure it all out. This is not to pass judgement on anyone or anything. Just trying to figure out how the television, internet, and those remnants of days gone by, newspapers, are dominated by tweets, hearings, interviews and the like coming out of the Presidential administration with no large reaction in the markets. I think we can all agree that this does get in the way of doing business when it comes to Congress and the future of our country. Yet the markets all but ignore it.

There are reasons to be wary. Not because anything wrong has definitely happened. But remember, the price of securities is driven by perception. And the perception seems to be that there is this huge distraction sucking our attention away. The rhetoric is continuous. So how does this all get ignored? I’ve come up with a theory, and that is all it is. But if what we focus on when analyzing price is what is going to happen in the future, than it stands to reason that the overall market is driven by this focus on a broad basis.

So there are a couple of possibilities. One is that the storm will pass and soon the focus will go back to things that drive the country and in turn the market. That sooner than later, we will be talking only about infrastructure and tax cuts. And that is an optimistic thought that I think we’d all like to subscribe to. I know I would. Those are the things that truly interest me when it comes to analysis and making sense of the charts (The stories behind the pictures).

In addition to the VIX constantly going lower and the markets in turn going higher (doesn’t really matter which is the dog and which is the tail), gold is not in a huge rally. It’s in a small rally, we’ve made multi-week highs, but it certainly isn’t reflecting a large flight to quality, or flight to security. It’s actually in the middle of a multi-year range. Ten year notes? Rallying as well. This can be perceived as a small flight to quality like the gold market, or it can be looked at as a reflection that the economy may not have as much steam as we thought a couple of months ago.

Gold cropped w Fibs

I do think it’s positive the way the markets are shrugging off the drama. But I still find it to be a bit confusing. And this is what leads me to my theory. I’m interested in what others think. Remember, the markets move on crowd opinion and perception, and you’ve read here before that it’s always good to know what the competition is thinking. Sometimes these thoughts are somewhat subconscious, but that doesn’t detract from the influence on our investment and trading decisions. This is more about investment than trading, as trading is a short term perspective in my opinion, but investing is based on what’s going to happen over a longer horizon.

So what’s my explanation? Well, I don’t know that it’s an explanation as much as another possibility that I know has been brought up by a few and generally just fades into the background. Are the markets pricing in the expectation that before too long our president’s last name will be Pence? Boom. Said it. Not wishing it necessarily but putting it out there as a possible explanation of why there is not more of a reflection of the drama among our country’s leaders.

Let’s examine what’s going on in Washington compared to the most dramatic time in the presidency in my memory, as well as many others. Nixon. Watergate. There were of course more factors at the time than that. There was an oil crisis. Lines at the gas pumps. This truly interfered with our ability to function in our usual manner. And the markets reflected all of this. Investor confidence plummeted. The stock market went down from soon after Watergate news hit. Those results cannot only be attributed to waiting in line to fill the tank.

Today, we also have other factors at work. It’s becoming a scary world. Terrorist attacks make the news more and more often. Worse than figuring out if it was an odd or even day for gasoline. And the market goes up. And the VIX goes down. Confidence doesn’t seem to be an issue. Are we all just acting like kids? “La, la, la, I can’t hear you?” I don’t think so. I honestly believe that there is the possibility we’re pricing in a change in the White House before 2020 or 2024.

Donald Trump is a wild card. We’ve not seen a President like this. We’re accustomed to career politicians. And whether or not you agree with any single politician’s opinions on issues, let alone the major party agendas, they are predictable based on their history. Donald Trump is not predictable. This we can all agree on. But Mike Pence is. There is a certain calm in society when we debate only issues. Right/left, the lines are relatively well defined. And this leads to a bit of stability. Even in bear markets, we have a reasonable opinion of what will happen tomorrow based on our leadership. And if indeed we are pricing in a Pence presidency, that predictability, that stability, both return. Agree with him or not, none of his tweets would be fodder for the types of reactions on both sides of the isle that we have now, if he would tweet at all from the oval office.

I’m not here to advocate for this result. I already stated that I don’t want to judge or bring my opinion of the drama into it. I just want you to think about what’s truly behind your decisions, and those of all the other people faced with the same question…am I bullish or bearish and why. This is quite the rally we’re in. And despite the contrarians, there is an extreme erosion of a volatility index. So don’t completely discount the theory without contemplating it. Because if what others are thinking is indeed part of the decision process, some people are thinking the same way I am.