Investors,
Yesterday’s edition of Cubic Analytics was solely dedicated to macroeconomic dynamics, specifically pertaining to monetary policy and the labor market. If you missed that report, I’d encourage you to read it below:
With the market continuing to grind higher, there are two things that I’d like to make a callback to:
On January 21st, I published “How Bullish Are You?”, and shared the following perspective: “While I have sincere doubts about the sustainability of the rally and the idea that we’re forming a new bull market, we can’t ignore the fact that momentum has been strong. Extremely strong, in fact.” Since then, the S&P 500 has gained +4.1% and the Nasdaq-100 has gained +8.2%.
On January 29th, I published “The Market Parties Harder”, and shared the following perspective: “investors are putting their money where their mouth is by moving into their highest conviction investments. Because the market is forward-looking, it only takes ‘less worse’ news to for the market to move higher and start to improve (see March & April 2020).” Since then, the market has celebrated more news that reaffirms positive underlying economic fundamentals. The labor market is strong, ISM figures improved, and a +0.25% rate hike is less than +0.5% or +0.75%. Party on!
The ongoing market rally has been catalyzed by these two components: market psychology and improving/less worse macro fundamentals. While I still believe that the magnitude & pace of the ongoing rally is exaggerated, I’m reminded of one of my favorite quotes about investing & financial markets:
“The market can stay irrational longer than you can stay solvent” - John Maynard Keynes
This rally has been irrational in some respects and rational in others.
How irrational has it been? On Thursday, 2/2/23, call option volume (a measure of speculative activity) hit new all-time highs.
The last two peaks which traded at similar levels were in January/February 2021 and November 2021, circled in teal. These levels perfectly coinciding with peak asset prices in different speculative slices of the market:
January/February 2021 was the peak for:
Ark Innovation ETF ($ARKK)
Marijuana ETF’s ($MSOS)
Dynamic Software ETF’s ($PSJ)
IBD Top 50 ETF ($FFTY)
Meme Stocks ($GME)
Microstrategy, which put Bitcoin on its balance sheet ($MSTR)
Bitcoin mining stocks ($RIOT)
November 2021 was the peak for:
Technology stocks, gauged via the Nasdaq-100 ($NDX)
Small-cap stocks, gauged via the Russell 2000 ($RUT)
Mega-cap technology stocks ($NYFANG)
Tesla ($TSLA)
Bitcoin & crypto
Local peaks for all of the companies/ETF’s mentioned in the Jan/Feb’21 list.
There’s a clear correlation between excess speculation and major market peaks. With call options hitting record levels, surpassing Q1 2021 and November 2021, investors should be aware of the market implications. In this report, I will highlight other major developments and significant data that I’m using to understand market dynamics. I’ll highlight other major components of greed and complacency, under the hood metrics for the S&P 500, earnings season dynamics, and three important Bitcoin and crypto charts you must have on your radar.