Sentiment Pendulum Swings.
It’s one of those days we talk about the macro context. Rate hikes are upon us, and the market is terrified, which is especially evident in tech stocks and crypto. So, are we entering the bear market (again)?
Let me remind you that we talked about the phenomenon of taper tantrums, which is the market’s reaction to upcoming rate hikes, back in November 2021. The key takeaway was that while historically, stocks performed poorly in anticipation of rate increases, the declines were not devastating.
The market’s reaction to the Fed dealing with inflation in 2013. It was short-lived. Source: Fisher Investments.
Importantly, historical performance doesn’t define future performance. However, let’s think about what happens in market participants’ perceptions.
“Buy low, sell high” is the goal for everyone on the market, yet retail participants are the ones to do the opposite. That’s because they make decisions on the edges of sentiment pendulum swings, while the truth is somewhere in the middle.
When the market is in euphoria, retail participants buy. Many were bullish on ARK Invest’s innovation ETF near the top. It wouldn’t surprise me if the same people sold near the bottom of this taper tantrum.
ARKK price (blue) and volume (green). Note that volumes started to pick up closer to the top. Now, they are growing near a potential bottom. Source: Nasdaq.
Now we’re seeing the emotional pendulum swinging to the fear zone. As it will be getting closer to an edge, retail participants will run from the market in increasing numbers. But while we know that there are institutional forces to buy from panic sellers on the stock market, we don’t know the same about the crypto market.
The lucrative idea of a “supercycle” has been in the air for several months so far. Although it’s the classic case of the “this time is different” fallacy, I think that the case can be made that this time is, in fact, different.
While there’s still no BTC ETF, institutional presence on the market has increased and isn’t showing signs of slowing down. One of the particular qualities of asset managers is they have a “herd mentality.” If you don’t buy something and it ends up an extremely successful investment, you will look like a sucker and probably get fired. That’s why more of them want to have crypto.
Considering how much money is in the system, you can say that there’s potentially an infinite bid coming for bitcoin. Even Warren Buffet’s peer in value investing, who beat the stock market for 15 consecutive years, is now holding half of his net worth in BTC. The less experienced managers will be simply forced to follow them.
One last thing I want to add to all this is the perception of risk and volatility. From the interview I linked above, I learned one important insight: people are afraid of volatility, and to them, assets usually look overvalued. That’s because loss is felt two times more acutely than gain.
I’d encourage you to reflect on this. Volatility is just a market function, which creates risk and opportunity. You have to take the risk if you want the opportunity, and there’s no way around it.
So, accepting the fact that your portfolio will dip along the way seems to be the best approach to avoid making emotional trades on the edges of sentiment pendulum swings.
SIMETRI Portfolio – Expected Dip
In the previous Digest, I said that we didn’t believe BTC was out of the choppy price action and might go lower. As it happened, the Portfolio expectedly followed. There’s still a risk it can go lower with the rest of the market selling off.
