In the midst of
inflation
concerns, overheated central bank money prints, a killer virus, and natural
disasters across the world, somehow the markets are drawing a picture of a
seemingly high demand for risky investment instruments reflecting an image of
insane overconfidence in the financial system. Last week,
Bitcoin recovered
huge losses and settled above $40,000 a pop, the S&P500 hit an all time
high, and sports are the trending topics online!
اضافة اعلان
Quantitively there are
far more people trying to enjoy the summer than there are people trying to
understand where the world is going —from the perspective of the younger
generations of course, which is seemingly shared by an older generation that
for some reason has a risk appetite that should have been outgrown.
Over the span of just
three days, gold — the world’s most valuable commodity and main safe haven for
all tough times — fell over $140 per ounce sending shockwaves through the
market and driving the greed of over optimistic hype-driven herds sky high. Such
price volatility is not ordinary and usually associated with recessions or huge
financial market crashes, yet we are not in either scenarios. What really
happened is a combination of fundamental and technical factors that pushed
prices to behave in an unordinary manner.
The impact of new
impulsive participants in financial markets (retail crowds) and cash-loaded
banks drove highly speculative assets like meme stocks (a new term for stocks
that are virally trending on social media), cryptocurrencies (a relatively new
tech baby calling for the restructuring of the banking system) and their likes
towards the ceiling.
Furthermore, the central
banks acting as enablers by promoting cheap and available money created a
psychological cushion for participants partaking in herd driven investing.
Finally, super cycles, a
technical theory dictating that prices change in a wavelike pattern and where
each wave is sequential and relative to subsequent waves pointed to a lower
price channel for gold. To visually imagine this, think of prices like loaded springs
that press and unload; the further down and longer they press they higher they
bounce back up. In financial markets this is called as momentum gathering,
where liquidity (money) is collected in the form of buying demand at a low
price channel.
Many market technicians
believe the price of gold overshot last year when it rose above $2,000 per ounce,
as not enough liquidity was accumulated in the asset to enable a sustained move
to the upside, and a correction (drop in prices) was necessary to bring in more
liquidity to the market. If you recall my previous
article where I explain
liquidity tranches, high liquidity especially at high price levels is critical
for the continued ability to transact (for sellers and buyers of different
sizes). Another technical factor worth mentioning is the Elliot Waves technical
indicator which also demonstrates that prices do move in a wavelike manner and
usually consecutive waves are opposite in direction (up, down, up, down, etc.).
The Elliot Waves are ordered in impulsive (upward) waves followed by corrective
(downward) waves and each Elliot Waves cycle is composed of 5 waves in total.
We are currently in the last stages of a corrective wave.
Now that we’re done with
the boring stuff, let’s delve into the real fun: Anticipated volatility. The
ancient Warren Buffet’s famous quote “Be fearful when others are greedy, and
greedy only when others are fearful” couldn’t have a better occasion to be
used. Market pessimists are like doomsday preppers; they have been calling for
a huge crash every year since the dawn of the first day of publicly traded
market assets. I am by no mean a doomsday prepper nor am I calling out a huge
market collapse tomorrow, nonetheless I believe a huge flip in direction will
take place between safe havens and high risk assets.
The economic data is out
and unsurprisingly the central banks actually managed to save some parts of the
economy with unemployment rates at good levels and economic growth rates in
influential markets also coming out healthy. This is great news for the real
economy but horrible news for traders who have started their trading careers
with the guarding eye of the central banks’ money machines. I am referring to
the current majority of traders in the biggest financial institutions and
banks. Traders that are young if not in age then in soul, traders who never
traded in an environment other than one controlled by the central banks of the
world that are always there to save the day if they slip.
Well, now that the good
economic data coming, central banks will have to start easing off their
helping-hand strategies and go back to the old-school less intervention. The
panic of institutional traders will be highly similar to retail, which will
cause high-risk instruments like Bitcoin to plummet after a few shake offs and
take years to recover. It will also cause safe havens such as gold to crash
only to bounce back immediately as it did today — recovering over 60 percent of
the drop! Or at least, that’s just some of the high level thoughts I have.
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