“To wake [up] and see Bitcoin down 15% at one point overnight was certainly reflective of [a] ‘speculative overshoot’ feel which has more people flagging a pending correction,” Nomura’s Charlie McElligott said Monday.
Bitcoin of course hit $34,000 over the holiday weekend, pushing the “digital gold”/real gold ratio to a record high (figure below) in the process.
For whatever reason, it (Bitcoin) decided to plunge 17% out of the clear blue sky (and that figure of speech serves a dual purpose here considering the stratospheric levels at which it now trades), before bouncing back.
Personally, I continue to believe it’s difficult to draw conclusions about other assets by reference to what’s going on in Bitcoin.
Over the weekend, I heard plenty of chatter about “lots of money looking for a home.” While I’ll concede that’s likely part of the surge in Bitcoin, alongside speculation that the ever-elusive institutional embrace is just around the corner, I suppose what I would note Monday is that assets don’t generally plunge 17% abruptly for no reason at all, unless there’s some kind of liquidity vacuum or fat finger. Currencies, especially those issued by developed countries, certainly don’t lose 15% of their value in seconds. If they did, a barter system would be preferable.
Anyway, Bitcoin’s hilariously monumental surge comes amid other signs suggestive of a burgeoning mania. The figure (below) speaks for itself.
For those not apprised of what exactly that shows, you’re encouraged to revisit “Front-Running Collective Irrationality.”
McElligott on Monday described a “foaming at the mouth speculative frenzy,” citing, among other things, the ARK Innovation ETF. And then there’s Tesla. And, of course, the IPO retail product, which has actually cooled off a bit.
In addition to the above, Charlie notes signs of extreme positioning. For example, flows into global equities over the past three months total more than $200 billion, while asset manager futures positioning in the S&P is in the 97th%ile since 2006 and the 99th%ile in the Nasdaq 100.
Meanwhile, the steady grind lower in realized vol catalyzed more than $34 billion in equities re-leveraging from the vol-control universe over the past month on Nomura’s models, which also show that CTA net exposure across global stocks is back to pre-pandemic levels.
What does it all mean? Well, that’s difficult to pin down, especially considering the scope for political drama stateside.
For McElligott, it’s possible that, worries around an imminent correction notwithstanding, a “‘pain-trade’ scenario” takes the market “higher into this month’s Op-Ex cycle” before a window opens up “for a correction lower quickly thereafter.”
“Some of the original November election hedges [are] set to expire in January, which will coincide with the ‘buyback blackout’ around earnings season,” he wrote.
When you consider that with extreme positioning and some of the rather glaring instances of speculation, a bit of “de-frothing” (if you will) could be in order.
But, again, it’s difficult to say too much right now with so many questions swirling around the Georgia runoffs, vaccine rollout, and top-tier econ data due out of the US later this week.