Stocktake: Has the bitcoin bubble finally burst?

There’s no shortage of commentators administering the last rites to bitcoin, which has more than halved recently following a crackdown by international regulators. However, it’s premature to say that the bitcoin bubble has definitively burst. The sheer volatility of bitcoin means it’s hard to distinguish between a correction and a crash. It suffered four declines ranging from 30 to 41 per cent in 2017, all of which were soon followed by all-time highs. Indeed, January’s falls appear trivial compared to past episodes.

Pension Partners' Charlie Bilello notes that, in 2010, bitcoin endured two separate collapses of 94 and 72 per cent; another 94 per cent crash followed in 2011; 2013 witnessed a crash of 76 per cent and the cryptocurrency fell by 85 per cent between November 2013 and January 2015. On each occasion, it appeared a huge bubble had finally burst, only to eventually reinflate. The irony is that, despite enjoying massive gains, owning bitcoin has always been a stomach-churning experience. Historically, bitcoin has been in a drawdown of 25 per cent or more 71 per cent of the time, notes Bespoke Investment Group. Is bitcoin a bubble? Yes. Will it burst? Yes. Is it bursting, or is this a mere "flesh wound", as Bespoke quipped last week? Search me. Given bitcoin's crazed price history, anything is possible,

Stock market sentiment is getting excessive

Stock market sentiment is nearing euphoric levels that will concern contrarian investors, judging by Merrill Lynch’s latest monthly fund manager survey. Signs of excess, or “peak positioning”, as Merrill puts it, are everywhere. Cash levels, which remained high for most of 2017 as investors remained cautious even as markets rallied, have now hit five-year lows. Despite high valuations and overbought technical conditions, the number of investors taking out protection against a near-term correction has fallen to its lowest level since 2013. Investors are the most overweight stocks relative to bonds since 2014. Hedge fund exposure is at levels unseen since 2006. Still, sentiment isn’t quite at the euphoric levels typically seen near market peaks. Cash levels have fallen noticeably in recent months but they remain about a percentage point higher than that seen at historical lows. Consequently, Merrill’s Bull & Bear indicator is at 7.1 – still shy of the 8.0 level that would trigger a sell signal. All parties end eventually, but fund managers expect this one to last into 2019. Despite increased grounds for concern, they may be right.

Short sellers get it right on Carillion

If there’s one lesson to be taken from the demise of

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Carillion

, the UK’s second-biggest construction company, it’s this – pay attention to short sellers. Short sellers, who bet on share price declines, were iffy about Carillion for years. The detective work began in earnest in 2014, after Carillion failed to persuade rival firm

Balfour Beatty

to agree a merger.

By late 2015, Carillion was the most-shorted stock in the UK, even as the vast majority of analysts continued to recommend the stock to clients, and short interest remained high ever since.

The shorts were right to be suspicious of Carillion’s financing arrangements and sceptical about the idea Carillion could buck industry trends – a host of rivals issued profit warnings well before Carillion issued the first of three profit warnings in July 2017. The shorts are always the first to smell danger, and research confirms investors should generally be wary about highly shorted companies. Instead of being lauded for their prescience, however, the shorts are invariably pilloried.

"Ruthless hedge funds target Carillion rival", the Daily Mail headlined last week. A return to the "casino economy" which "brings devastation to people's lives", said Labour MP Valerie Vaz, complaining about hedge funds "betting on the collapse of the shares of a company that provides vital public services". Such indignation is misplaced. Many people are to blame for the Carillion debacle, but short sellers are not among them.

Olympic success distracts investors

Investors get distracted when their country enjoys success during the Olympics, according to a new study. The study,

Is there an Olympic Gold Medal Rush in the Stock Market?

, found market trading volumes and volatility have been “substantially reduced” during recent Olympics. This is true of the US but the effect is especially evident in Germany and

South Korea

. For each gold medal won, national trading volumes fell the following day by 6.7 and 7.3 per cent, respectively. The study might seem gimmicky, but much literature confirms high-profile sporting events like the World Cup can influence investors. Football losses, in particular, can hit national stock markets, which ties in with behavioural finance literature regarding loss aversion – the well-established theory that people (including investors) are much more impacted by losses than gains.

The Olympics effect appears to be somewhat milder, with actual stock returns neither stronger nor weaker than usual. The Games “affect the attention of investors but not their mood”, the study concludes.