Morning Market Thoughts
Good morning. Stocks are opening slightly lower (yet again), and it wouldn’t surprise me to see the market close higher (yet again). This just seems to be the way of things in the current environment. But when the market direction seems soooo clear, the risk of typically the highest. As I noted last night in the Strategy Session, when considering the task of climbing the Wall of Worry, you are either part of the problem or the solution. If you are invested in stocks, then you’re actually part of the problem. Sure, you’re a cheerleader and are happily waving your pompoms as the bull runs. But you’re no longer of any help to the market. Rather, you are part of the ceiling that can kill the rally. The only thing you can do is sell. And the only question is “when”. If you are underinvested and carrying a lot of cash, you are part of the solution. You’ve got money to exchange for stocks, which increases demand. And when demand is strong, stocks move higher.We need a healthy balance. We need some optimistic cheerleaders and we need some curmudgeons who are either pessimistic and have no intention of buying stocks right now, or are frustrated because they wish they were invested and fear missing even higher prices. It’s the balance between the two camps that keeps the boat level. But when everyone shifts to one side, the boat tips over.
Bullish sentiment continues to be quite high, which also increases the risk of a pullback as the group of optimists (potential sellers) overwhelms the group of pessimists (potential buyers). This will ultimately happen; only the timing and magnitude is unknown.
As long as we understand the dynamics at work, we can be comfortably invested by paying attention to each stock that we own, and setting fractional stops on those positions. By “fractional stop,” I mean avoiding the “sell it all” order by setting a series of stops — even two is better than 1 — at successively lower prices. Fractional stops create a balance between risk and reward. If the pullback is small, you might get hit on your first stop, but not the lower stop(s). You’ve cut your risk, but stayed in the game. If the pullback is more substantial, your stops get hit in succession. So the more “wrong” you are, the less risk you will have. This simple adjustment in your trading behavior will payoff over the long haul because you’ll be able to hold winning positions longer rather than get shaken out of the entire position during a normal pullback in price.
One other thing. Last month, Jamie Dimon launched into a rant about Bitcoin being a fraud worse than tulip bulbs, declaring that any JPMorgan employee who was caught trading Bitcoin would be fired for being stupid. This morning, in an article on cnbc.com, Dimon said that he would no longer be commenting on Bitcoin and noted that he “was reminded that we move trillions of dollars a day…digitally. It’s not cash.” (By the way, the Bitcoin market moves “trillions of dollars a day…. It’s not cash.)
A couple of takeaways. First, Dimon’s new “I’ll stay quiet” stance likely means that JPMorgan will be starting a Bitcoin trading desk soon to capitalize on the inordinately high fees made by market makers, not to mention the trading profits that can be made from trading this very volatile market. In an environment where volatility is basically non-existent, I don’t know how an investment banking firm can pass up the chance to participate in volatility on steroids. It just doesn’t make sense…particularly when you consider that a sophisticated trading firm like JPMorgan can reap huge profits if the Bitcoin bubble does indeed burst. Goldman Sachs is already considering starting a new Bitcoin trading operation, so Jamie needs to slowly and quietly withdraw from the conversation. Last month he said that any JPMorgan employee who was caught trading Bitcoin would be fired due to stupidity. That statement will probably come back to haunt him. When JPMorgan does open its trading desk, somebody needs to be fired for stupidity — and it might have to be the CEO.
By the way, Bitcoin broke through $5,000 and is now at $5,200. So the bubble continues to inflate.
I take no position on whether Bitcoin is a viable currency or investment. I’m just commenting on the abrupt change in stance by Dimon. Also, this change in stance should be a reminder that the most seemingly intelligent people who have megaphones often give the appearance of superior insight because they speak so emphatically. But often times, they’re just full of crap. Remember Mark Twain’s declaration that “It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.”
See you in the forum.
–Dan
Market Update