When "reading the tape" analyzing charts, etc... You have to realize the market is trying to take your shares, your crypto, your assets, etc. It is trying to exploit your emotions and the emotions of participants. Some people might even use the media to acheive these ends. And therefore most of what you see is not friendly to your wealth.
You can look at overall allocation and defensive trading and just systematically acquire more lower and reduce higher perpetually, and there are many good methods towards doing this and adding debt and leveraging risk adjusted returns into higher returns on equal levels of risk or whatever you'd prefer to have in terms of risk tolerance, or you can go on offense and try to figure out when markets are vulnerable and even picking individual stocks that will benefit the most from your thesis.
Recently I've mapped psychology and volume profiles to recent price action. The market in April did something interesting, it bled lower on fear until people said "F this" (capitulation). You get better at spotting capitulation and watching the action over time.
In other words they gave up and surrendered their shares at a 20% discount to the high. The market was trying to take their stuff then. It's trying to take your stuff now. It's always trying to take and whenever it is trying to give, be careful. Following that capitulation, markets had a sharp responsiveness and buying and people chased higher. Then they bled lower quietly shaking off the recent weak hands.
All of this was a mechanistic behavior to get your shares.
This action in april in markets, appears to be occurring in cryptocurrencies as a microcosm of what happened in april to markets. Same behavior. capitulation, response, fade. A series of failed captiulation followed by ultimate capitulation. It may be too early to say if this is the real capitulation but the price action look to have blown out in similar fashion or to be close.
ETH
qqq in april vs BTC today
Now what we have is a buyer underneath who buys your capitulation who represents potential support if he defends his prices and the sellers who are without who will likely chase higher because they are reactionary rather than anticipatory traders. Once you can see this trading will make a lot more sense. You can learn the nuances. The smart money normally is doing something different from the crowd. The Graham and Buffet wisdom of being greedy when others are fearful, accumulate when others capitulate creates the floor and then how things respond afterwards tells you if the rest of the participants will respect those price levels or not, or if there is more to come and another capitulation event even lower and a larger whale to swallow by a bigger shark below.
you could go to the hourly chart and also probably see some similarity. over time and cycles you learn to see familiar group psychology and to be less affected by your own emotion and more affected by your experience. You can kind of see the third wave of capitulation was the one that stuck. So far it seems to be the same with crypto here. Time will tell.
You may see a difference in responsiveness, and it isn't a guarentee that just because last time the buyer was right and the seller was wrong that there may not be more pain and what you thought was capitulation could be dwarfed by the volume and emotions reaching greater extremes. But the act of reading the tape is that you are looking for certain clues and similarities mapping behavior, psychology, volume, price and narrative together and cross referencing it with any other sort of clues you can find to support a narrative, or disprove your existing one. And from there you identify where your narrative fails and where you need to adjust and manage risk against.
For example, we also have very bullish traditional calendar seasonality, election year cycle seasonality, and decade seasonality (5th year in a decade) suggesting bullishness ahead. It all culminates together, but if things don't respond, in general, then you can start looking to protect yourself a bit more and lighten up and look to add on the next capitulation wave. I strongly suspect this one will hold. If you want to be the wait for confirmation crowd and draw lines like i did and buy from higher when there is less heat just make sure you do it early enough and can have a big enough return on your risk to make it worth avoiding the heat that buying lower might invite. You have more upside buying from lower, but if you want to get stopped out and shook multiple times entering and exiting you can try that style and see how it works for you. Some people can pull that off.
I personally have been around long enough to notice a pattern in group think where so many people want to bet against the market so early following a significant correction. It reminds me of various years where just following a 2011 correction and previous bear markets how eveyrone wants to play hero and bet against apple and amazon and netflix and tesla. Now they're betting against the stocks that move the most early in the S curves, calling for top in crypto and quantum and AI and palentir. Everybody thinks they're Michael Burry, even Michael Burry (his reputation is bigger than he is) and as one astute commentator put it, "we're in a bubble of people calling for bubbles". Tops just aren't made from this sort of group think. When people call for irrational exhuberance and such like Greenspan in the mid 90s, it is not bearish.
Martin Shkreli is shorting quantum and attracting so many followers who say he's "right" and he is letting people know how they can short Open AI PRE-IPO. That might be like shorting facebook preIPO. Or a bit like Chanos shorting Tesla. Pre Revenue transformational technology companies are not the ones you want to bet against as the extrinsic value has not even developped its case, or some popular bloggers shorting amazon or a guy on CNBC shorting netflix like in the early 2010s. Or people mocking Michael Dell and Steve Jobs for starting in a garage. Or like Buffett passing on apple or amazon only to buy back when it is a mature company with less growth is discounting the extrinsic value of what these companies can become and what the entire global economy can become 20 years from now. And now he's doing that with Google although now you at least know they could be a player in AI. You ask openAI to look for blindspots in a thesis and why someone could be wrong and layer enough questions on it and it will let you know just how large the total addressable market size can be for a theme in general and it could be the worst call of all time if the economy itself undergoes another extrinsic shift.
People are also pointing towards bubble without adjusting for the increase in M1. That might prove like people calling it a bubble priced in zimbabway dollars because it didn't collapse 99% in price. The global bond markets collapsed in the 90s and in the lead up to russian default and east asian default you saw liquidity concerns and a chase into the dollar. Divide most moves by 5 or 10 and measure the total % allocation of global wealth and the global bond market is still closer to a bubble than stocks. What if everyone was to become trillionaires, where would they put their money if not stocks even at absurd valuations and low yields? Why isn't the shiller PE not going to make higher and higher lows and higher and higher highs over time? and if so, where does it stop? Why not 100 where stocks yield 1% but also gain from the debasement of cash and acceleration of overall growth? I wouldn't be as bullish at 100, but at 40 in an uptrend during a convergence of multiple S curves and transformational technologies with bearish sentiment following capitulation and global debt to gdp at 300? I'm not putting my money in bonds. There are still going to be people flooding away from risky bonds after defaults of countries that I can sell to, there are still demographic shifts and capital changing hands that results in reallocation of capital that I can sell to.
And look at demographics. The Millennials are expected to see a 5 fold increase in wealth in the next 5-10 years from inheritance and coming into positions of jobs as genx retirement age approaches and as the last of the young boomers late retiring. And they're allocating towards crypto, real estate and growth stocks at much greater allocations than boomers and gen x. You can front run this capital. based on market size vs wealth you could see a 17% per year increase in bitcoin over multiple decades just to get asset allocation consistent with the millennial demand not even including any crowding and network effect and sentiment shifts towards enthusiastic extremes or global allocation shifts. That does assume their preferences remain constant and some other stuff that may not be true but the peak demand (bubble) would be higher and would be driven by enthusiasm. That doesn't even get to the gen Z capital and assumes baby boomers and wallstreet won't eventually participate more than 3% or whatever. You still have the brexit/pigs bond default like event and credit downgrades like in 2011 or the russian defaults and east Asian bond defaults like the 90s that will flood some more capital into growth. If you're playing defense and willing to lay off for 6 years like Buffett in 1994 and you want to buy some no-tech insurance companies and defensive names and wait it out while underperforming. Respect. Disagree, but with the approach for the environment, but respect. If i had a time machine and wasn't sure about the exact year but recognized that I was probably in the 1990s, I'm not freaking out and buying bonds and raising cash after a capitulatory decline, pop and fade. I'm going to the transformational tech and their associates. The new era PCs and hardware and software and dot coms. If you teleport me and I think i'm in the early 2010s and I'm not sure what year, I'm not sitting in energy plays and utilities and bonds and consumer defensive waiting for covid to hit following a decline and return. I'm looking at smartphones and associates and new wave crypto and associates like ETH and others. You put me in today I'm looking at the new wave tech and associates.
If I see things a little enthusiastic, from high prices and the market is underneath and coming up against that support and bulk of volume is underwater and the narrative is played out and now everyone is talking about buying the dip and everyone is saying how acting like Buffett and value investors are idiots and then I might play the defense type names. If you say "even if you bought the peak of apple in 2000 or 2007 or the peak of coca cola in 1929 how you'd be up a lot 20 years later and you choose to identify the quality companies with ability to innovate and growth prospects at any price. Respect. Disagree with the approach, but respect. if I had a time machine and wasn't sure but recognized I was probably in some time in 99 or 2000 or 2006 or 2007 or 1927-1929 and prices were at all time highs, I'm getting defensive, paying off debt and margin, rotating to defensive sectors, looking for gold or energy or oil or bonds or whatever, etc.
Now I'm not saying it's the late 70s or mid 80s because that was probably more 2009 or 2015, but if you look at growth nasdaq vs dow or small caps we are only just breaking out, so maybe things are more 1987 post crash. or 1992 at new highs. and things aren't properly valued by prior methods due to the extrinsic shift and currency debasement and future debasement that will occur that isn't priced in. you divide any valuation by 5 or by 10 because we are in post gold standard era and pre-government globally acquiring all the equities era and willing to pay higher for all sorts of reasons. and suddenly you have to question everything. And if so... how much of a runway do we really have if AI is in its infancy, if robotic wage slavery with us taxing 80% of robotic output or directly acquiring the equity/tokenized valuation is the eventual plan to pay for things and lower the economic strain, regulation, taxes, etc on everything else and increase the stimulus or equity buying everywhere else proportionally to the money raised or even multiples more using additional debt/equity increases and additional debasement.
If 1981 was more like 2017 when inflation adjusted the nasdaq finally toook out its high and 2025 is only just when nasdaq to dow is taking out its high and the russel is working on its total price high now and that is more like 8 years later and 1989...or 1991 or 1992 had some small volatility that wasn't the 1987 or prior concerns but was enough...
What if growth is ultimately going to outperform value for the long run as I think it should and we have not yet made that extrinsic shift? I think human history is one extrinsic shift after another with the occasional intrinsic counter trend. If we didn't, shares wouldn't hold any value at all. It is only because of the development of markets, economies, legal systems, governance, structures, banking institutions and so on that can enforce the idea that shares represent the underlying. If they fail to represent their underlying, there isn't intrinsic value. Shares are just a container for what Buffett bets on because of the extrinsic shift. Buffett and value guys will thrive from the intrinsic counter cyclical shift and being well enough capitalized to participate in extrinsic expansion, and has bennefitted from the 1958-1970s secular bear where they could be agile and pick off neglected value, from their own extrinsic shift towards quality (lifetime earnings) and away from cigar butts (liquidation value) under Munger after 1978 and from the "lost decade" when Buffett failed to make the next extrinsic shift towards tech and crypto and unicorns and decacorns and disruptive innovation and growth, but he and Abel did participate in Amazon and Apple after they made an enormous run so he made a slight extrinsic shift towards tech which he never would have done in the past, and now perhaps their participation in Google represents a recognition of extrinsic potential.
The 2000 top growth only just inched ahead. Growth may still be badly underpriced if we continuously make extrinsic shifts. Growth obviously lagged behind terribly in the 70s and has yet to catch up despite it outperforming in more recent time frame measurements if you pick different starting points. Although some of it may be masked by the private equity unicorns and decacorns and the ability for the market to take private the companies before they undergo their growth, and IPO them at more absurd valuations once the growth begins materializing.
...Some of this depends on starting point and what you are measuring.
And so you could conclude value is on sale and growth is overpriced if you look at the wrong starting point. But I think growth has badly lagged and is catching up and value is lagging and will continue to lag but value is still overpriced on the longer term scale. If so, you will see growth at least come into parity with value if not surpass it and never look back.
Afterall the human condition if nothing else finds way to do more and more with less and less in perpetuity. why would any historic calculation based on a past that no longer exists be any anchor to the present if the broader longer term trend is to eventually to everything with nothing? Is there any reason we return to the stone age? If we avoid destroying ourselves and we escape the risks of an asteroid I don't see anything limiting our expansion beyond earth and to mine asteroids and build in space where growth potential is unlimited and the money supply certainly is not limited and accelerating acceleration is certainly possible (Kurzweil singularity). If everyone ascribes to the belief that money and price and valuations don't matter at all and buy growth for any price and technicals don't matter either because if you bought the top in anything it eventually goes higher and they ignore psychology and sentiment also and are complacent about everything, then I will certainly not want to participate in growth and want to get more defensive than the crowd and to watch technical price points and sentiment points and price levels of bagholders and bet against them with a clear point I am wrong above them. Until then though I am seeking opportunity to bet higher in new wave tech and extrinsic shifts.
I'm seeing a lot of stocks setting up with what many weak hands will interpret as bearish which create potential for the "flip". Then you'll see a breadth thrust and that is when the bulls will flood and shorts will squeeze and supply of shares will contract.
If there is a bearish concern it is rising dollar, rising volatility, rising stocks in terms of higher lows. I think this is in context of a 90s like retail participation environment (rising volatility from inexperienced traders reacting more emotionally and algorithms figuring out how to trigger the emotions) with rising repatriation of capital into the US and therefore confirms the bullish narrative rather than defies it, but if you are a bear, you combine that with maybe some liquidity concerns and you have your boogeyman. I think you need frothy sentiment first however and an abundance of liquidity followed by it drying up before the concern comes in or some kind of loss of momentum, but that's just my opinion.
I don't mind being a bit "late" to call a top, the market favors asymmetry to the upside most of the time because stocks can only go to zero and upside is not limited. I would rather trade the conditions I am in and wait for the market direction to confirm it is not able to sustain it's larger long term trends. When that occurs I may be interested in limiting my portfolio's standard deviation, and increase it once I avoid the downside volatility and start getting early signals suggesting risk is to the upside. But the market has such low correlation that the market itself doesn't inform much about the risks and that makes things a bit more challenging. And if you use leverage to begin with it becomes a more dangerous proposition to increase it too much. Striking the right balance between defense and stock ownership or even indexing strategies and allocation strategies, and offense and options to then reduce the amount of defense is challenging.
