Bitcoin, the Nasdaq, Treasuries - It's Bubblicious

Posted by TopstepTrader on January 04, 2018

bubble.pngIt's easy to get wrapped up in headline-grabbing financial commentary. For those of us who live and breathe  trading, it's hard not to have a strong opinion on long-term market trends. Nowadays, you can't go far without hearing that Bitcoin, equities and Treasuries are in a bubble. 

Instead of getting wrapped up in the hype, Billionaire Hedge Fund Manager Cliff Asness argues that the mainstream understanding of bubbles is wrong. He thinks too frequently "bubble" is synonymous with "expensive": "The term bubble should indicate a price that no reasonable future outcome can justify." 

Is Bitcoin a bubble? Are there future scenarios that could justify the current price? Imaging that might require a bit more of a discussion and understanding of cryptocurrencies. 

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Are low U.S. Treasury Yields a bubble? No. Look at Japan - there are situations where long-term yields can even go negative. Is it a likely scenario? No... but an unlikely scenario isn't a bubble. 

What about equities? Not now. Current valuations may indicate lower long-term expected returns - but there are plenty of future outcomes that could justify current valuations. 

More importantly, as short-term day traders, getting wrapped up in the bubble headlines can actually hurt more than it helps. If you think that equities have to fall in price, you won't be looking for the intraday signals to buy. And you could miss a lot of opportunities.

It'd be easy to recommend that you ignore the headlines. But these headlines are everywhere. A quick search reveals a small fraction of articles written in the past year... 

Besides being intellectually interesting, we have to remind ourselves that these headlines have no impact on what markets may do tomorrow.

So as you get back to markets this week, ignore the hype. The market doesn't have to do anything. If you have to, remind yourself of the classic quote from economist John Maynard Keynes:

Markets can remain irrational longer than you can remain solvent. 

Happy trading.

Have any feedback or questions? Put them in the comments below.

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Topics: Trading Basics, Trading Lessons, Futures, Bitcoin, U.S. Treasuries