Speculators go bananas about bitcoin

Stocktake: Indications of speculative bubble in cryptocurrency’s wild ride

“Pointing out the insanity surrounding bitcoin invariably catalyses apoplectic reactions from supporters protesting sceptics don’t ‘get it’.” Photograph: Philippe Lopez/AFP/Getty Images

“Pointing out the insanity surrounding bitcoin invariably catalyses apoplectic reactions from supporters protesting sceptics don’t ‘get it’.” Photograph: Philippe Lopez/AFP/Getty Images

 

Writing about bitcoin can be a nightmare. By the time you’ve finished a paragraph, the cryptocurrency is likely to have experienced yet another wild price swing.

Last Wednesday, for example, everyone was wondering whether it would take out the much-watched $10,000 level. It did, and exceeded $11,000 just a few hours later. Shortly afterwards, it fell hard, declining 21 per cent to just above $9,000. In stock markets, a 20 per cent sell-off designates bear market territory; in bitcoin, it’s an intraday dip.

Bitcoin’s wild ride proves you can sometimes make a lot of money doing very stupid things. The Bitcoin Investment Trust, for example, has recently traded at a premium of up to 80 per cent above its underlying holdings. If you’d been dumb enough to pay that premium, you’d have almost doubled your money in recent weeks.

Pointing out the insanity surrounding bitcoin invariably catalyses apoplectic reactions from supporters protesting sceptics don’t “get it”. However, while the underlying technology of cryptocurrencies may be invaluable, that doesn’t mean this is anything other than a speculative bubble.

The internet fulfilled its early promise and revolutionised the world, but you’d have lost your shirt buying dotcoms in the late 1990s. Most cryptocurrency bets are unlikely to be any different.

Investors take profits in tech stocks

Good news for stock markets can be bad news for high-flying technology stocks, as investors discovered last week.

Last Wednesday, the Fang stocks – Facebook, Amazon, Netflix and Google – suffered their biggest one-day drubbing in five years. Better-than-expected economic data coupled with the prospect of tax cuts resulted in a dramatic rotation out of overbought technology stocks and into US-oriented and higher-taxed firms.

Consequently, while the tech sector fell more than 2.5 per cent, the blue-chip Dow Jones index rose – a combination seen on only two occasions over the past 15 years, according to LPL Research analyst Ryan Detrick.

Nevertheless, far from marking a decisive break in the market trend, last week’s action could be viewed as a continuation of one – namely, the sector rotation that has characterised 2017. Different sectors have taken turns holding up the market this year; a sell-off in one industry results in money moving into another.

The net result is there tends to be little daily change in index levels – the largest one-day gain this year has been just 1.38 per cent, the smallest “best single day” of any year since 1964, according to Ritholtz Wealth Management – but a lot of action is going on under the surface.

The S&P 500 has risen every month this year and investors are afraid to miss out on further gains. Taking profits in one sector is fine as long money is put to use elsewhere, as evidenced yet again last week.

Woodford pays price for Brexit complacency

Neil Woodford, long regarded as Britain’s Warren Buffett, is under pressure.

Fund group Architas last week followed the lead of Jupiter and Aviva and pulled its money from Woodford, who has badly underperformed in 2017. Even the best fund managers occasionally underperform; Woodford may just have been unlucky. Then again, you could also argue his previous success was the product of luck rather than skill. Disentangling the two can be difficult.

One thing is for sure. Many investors will not be reassured by Woodford’s continued complacency regarding Brexit. He recently complained about anti-Brexit “drivel” uttered by the “London elite” and the “vested interests”. He also argued that the independent Office for Budgetary Responsibility (OBR) was too pessimistic, saying it “has been wrong on productivity over [the] past five years” and “there’s no reason to believe that they will get it right over the next five years”.

He neglected to mention the OBR’s mistake is that it has overestimated productivity, not underestimated it.

Woodford’s language and analysis are more in keeping with the Daily Mail than the Financial Times. Investors are right to be concerned.  

Broad rally augurs well for stocks

Throughout 2017, commentators have warned indices are dangerously reliant on high-flying technology stocks. Last week’s strength in the face of a tech sell-off suggests otherwise.

Stocktake has consistently argued this has been a relatively broad-based rally, not a narrow one dependent on a few stocks. Crucially, market breadth continues to improve, notes Oppenheimer technical analyst Ari Wald, as evidenced by the Value Line index.

An equal-weighted index designed to capture the performance of the median stock, it hit its first all-time high in 17 years last week.

A whole host of indices – the small-cap S&P 600, the mid-cap S&P 400, the tech-heavy Nasdaq 100, the Russell 2000 and the All Country World Index-ex US – are also joining the party. So too is the NYSE index: consisting of some 2,800 stocks, it hit its first all-time high since October 20th last week.

Rallies thin out before peaking. Increased participation indicates the bull market remains in rude health.

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