What Comes After $35,000 Bitcoins?
By Joe Duarte on December 11, 2017
Bitcoin is a money magnet and the stock market
may be suffering from the neglect of buyers flocking into the cryptocurrency.
Despite the best efforts of what those who might have been considered
rational thinkers in the past, yours truly included, we are still in
a bull market for stocks. Of course we can all argue about the reasons
for higher stock prices and what the future may hold. But at the end
of the day, the inevitable crash just hasn’t materialized, at least
not as of this writing. Yet as uncanny as the current bull market in
stocks has been, we are now entering into something completely different
in the realm of uncharted territory. Of course, I am referring to the
entrance of Bitcoin into the “legitimate” universe of real markets,
as the cryptocurrency starts trading in the futures markets.
I’m not going to get into the pros and cons of Bitcoin. It’s here,
and it will do whatever it ends up doing no matter what I think. And
when Bitcoin and the other cryptocurrencies fulfill their eventual
destinies, there will be repercussions. That said, I think we can all
agree on one thing; Bitcoin is attracting a great deal of attention,
As the chart of the New York Stock Exchange Bitcoin index (NYXBT)
shows, the price of Bitcoin has gone nearly parabolic – nearly straight
up- as money has poured in, especially over the last few weeks. Now
so much money has flowed into Bitcoin that the price closed outside
of the upper 20 day Bollinger Band on December 8. Usually, this is
a signal that prices have gone too far in the current direction and
that a correction is likely in the not too distant future. But I get
the feeling the trap isn’t quite ready to spring yet. With the advent
of futures trading on Bitcoin I would expect the price to rise even
further in a very short period of time - $35,000 by the end of the
month – anyone?
Indeed, we may still be in the early innings of the the cryptocurrency
mania. Things, believe it or not, just aren’t crazy enough at the moment.
For example, a week before the tech stocks broke down recently; a friend
of mine pulled me over to thank me for recommending tech stocks to
him over the summer. I sold my tech stocks a while back and I told
him he might wish to lighten up on his. But he was just giddy and smiled
at me shaking his head. – Oh Joe, you don’t understand. I haven’t heard
from his since. Maybe I’ll ask him about Bitcoin. I will report on
it here, of course.
Anyway when an asset class attracts as much attention and money as Bitcoin
is currently doing, it usually means that there is less focus on other
investment opportunities. Furthermore, history shows that it is often
those areas that are overlooked during periods such as the current Bitcoin
moment, that are the ones that deliver meaningful profits, often with
less risk. Thus, as Bitcoin sucks up all the air in the proverbial room,
I’ve found an underappreciated area of the market which offers opportunity
with less risk. I’ll tell you about it below.
Uptrend Remains Intact for Now
Believe it or not, Bitcoin is not the only way to make money in the universe.
For one, the stock market has had a pretty good year. Paid subscribers
recently banked 150% profit on a call option in a few days. And it’s
not a smart move to argue with the one stock market indicator that has
been correct for the past 13 months, the New York Stock Exchange Advance-Decline
line (NYAD). Again this past week NYAD made a marginal new high, suggesting
the odds are still favoring higher stock prices.
As usual, it’s not a perfect picture. For example, this week the
ROC is not very robust, suggesting momentum is not quite as strong
as it could be. And the RSI is sort of stuck in no man’s land. If these
indicators don’t improve, we may see yet another swoon in NYAD, which
may give us yet another opportunity to buy on a dip. For now the line
itself is still in a bullish posture. So the bulls get the benefit
of the doubt.
Big Stocks Losing Followers
So while the NYAD is still bullish enough, there is a bit of a shadow
developing in the big stock indexes. Right now, it’s difficult to know
whether money is just not going into the large cap stocks or if it’s
tricking out. No matter the reason, one thing is clear; the rate of
advance in the big stocks is slowing. Even at a casual glance, you
can see that the S & P 500 (SPX) and the Nasdaq 100 (NDX) indexes
are a bit off their games. While SPX is near an all time high, NDX
is well off a potential new high. Furthermore, NDX is still in a lower
high and lower low price pattern.
Consider the Accumulation Distribution line (ADI)
and On Balance Volume Indicator (OBV) on SPX – both are well off their
best levels, with OBV actually being in a short term down trend. That
suggests sellers are gaining the upper hand. On the other hand, OBV
and ADI are fair on NDX, but ROC, which measures momentum is below
the zero line; suggesting upside momentum is weak at best. Perhaps
the most bothersome aspect of both major index charts is the falling
volume both on rising and falling days. This last piece of information
is important because when volume starts to contract, it’s usually an
indication of a potential liquidity problem.
When you put the weakness in OBV, ADI, and ROC, as applicable to
SPX and NDX individually, a picture of a potentially vulnerable market
Stealth Bull Market in Construction and Materials
As I stated above, the large capitalization stocks in SPX and NDX seem
vulnerable. Yet, there are some specific areas of the market which are
currently exhibiting some relative strength. Indeed it is often in December
when a new market sector starts to make its move out of the pack. And
right now, it looks as if that area of the market, which may become an
early favorite in 2018, is construction and materials.
A review of the Dow Jones U.S. Construction Index (DJUSCN) shows
a bullish chart pattern where this sector has rallied off of its August
and September bottom and is starting to build a base above the highs
achieved on the bounce from the late summer rally. The 700 area seems
to be an area of good support, so as long as prices remain above this
key chart point, the bullish case remains intact. I have recommended
four construction and material stocks to my paid subscriber list over
the past week and there are others which soon may make it to the active
December Promises to be Significant
The price charts suggest money is flowing out of tech and into Bitcoin
as well as building and construction stocks. Moreover, the length of
the bull market in stocks, combined with the political climate and
the emerging patterns of money flows, suggest we are close to some
type of meaningful shift in the market. I’m not sure if this means
a crash in the stock market is just ahead or if we are merely getting
close to a rotation away from technology into more tangible investments
such as building materials and construction. For now, I will take my
chances on brick and mortar – the construction stocks rather than code/Bitcoin.
That is, of course, until a liquid way to use options on Bitcoin that
is not in the futures market materializes.
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