Category Archives: parabolic

Bitcoin: Revision and Update

What We Got Wrong

On June 15, 2017, we proposed that a prior decline of –14.94% had set expectations of what Bitcoin participants were willing to accept for downside risk.  That logic was turned on its head when Bitcoin declined from the high of $3,018.55 and then fell as low as $1,938.94 or –35.76%. 

The revision that we’re making is that as each decline grows, participants will accept even larger declines if the expectation is that it will exceed the prior peak.  So far, Bitcoin participants accepted a –14.94% decline followed by a –35.76%.  In each instance, these declines were followed by new highs in the price of Bitcoin. By our rationale, Bitcoin will now fall as much as –35% and possibly more as participants become inured to the pain of loss in anticipation of new highs.

Where We Got Lucky

We can’t confidently claim to be right about the prior calls that appear to be “correct.”  However, we can point out the coincidences that occurred:

  • The decline from $3,018.55 to $1,938.94 was fairly close to the conservative downside target of $1,442.92.
  • The recent peak at $4,425.30 was close to the $4,328.74 we set on June 15, 2017.

Review: Lumber Liquidator

As early as February 2015, when the stock price of Lumber Liquidator (LL) was trading at $50, we had indicated that there was a risk that Lumber Liquidator could decline below $23.47.  Since that time, LL had declined as low as $11.

In March 2015, we outlined our own theory of a coincidence indicator that would help investors know when the price of LL should recover.  Since that time, LL has fallen in line with our theory and has subsequently increased in price along with our proposed coincidence indicator.

From the low in LL stock price in 2016, we have seen the stock price climb as much as +200%.  The actual gain based on our recommended purchase price would be approximately +16% (8% annualized) assuming equal share amounts at/or below the recommended levels.

So what does the coincidence indicator say about LL and the prospects going forward?  The chart below is clear on this matter:

Bitcoin Review

On January 12, 2017, after Bitcoin achieved our prior downside target of $772.12, we said the following:

“Those who wish to speculate on Bitcoin should assess the risks and consider buy[ing] at [the] current level.”

Anyone who bought based on our work should have known that on January 1, 2017, we had the following upside targets:

  • $1,158.18 (conservative)
  • $1,737.26 (mid range)
  • $2,316.35 (extreme)

What is important about our upside targets, issued on January 1, 2017, is that we emphasized a downside assessment was necessary after a parabolic run-up.  We expected that the price would need to experience a large decline before any material rise could ensue.  Shortly afterwards, on January 12, 2017, our downside targets were met.

On May 10, 2017, Bitcoin has achieved a new high of $1,750.  If this level can be sustained, we think that the extreme upside target of $2,316.35 is possible.  However, we have to acknowledge the downside targets that come with a parabolic increase.

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Serious speculators (as opposed to investors) in Bitcoin should consider the inevitable decline that is to come as a reaction to the parabolic rise.  Yes, there is a good chance that our target of $2,316.35 will be achieved.  However, if, as a speculator, you have enjoyed some or all of the run-up since our January 12, 2017 recommendation, then you probably want to be able to enjoy it.  We recommend selling now and watch for the ascending downside targets.

Craft Brew Alliance Meets Our Target

On September 1, 2016, we said the following of Craft Brew Alliance (BREW):

“Although there is no assurance that the stock needs to decline to the referenced downside targets, any parabolic move must be watch closely as entropy will kick in at some point.  In this case, we believe that the ascending conservative target [$12.57] is a lock.  With established history as an indication, the mid-range target [$10.02] looks to be a safe “bet” as well.  We’ll check back in on this as more time has passed.”

We don’t necessarily believe it but here we are, with BREW at a price of $13.15 and well within the range of the conservative downside target set at $12.57 as established in our piece dated September 1, 2016.

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The September 1, 2016 article lays the groundwork for what a person interested in BREW should look for and expect.

Market Speaking Volumes

Volume Review

In a Dow Theory Q&A piece dated April 8, 2013, we said the following of stock market trading volume:

“The lack of trading volume in the stock market since 2009 reflects little or no participation on the part of the public.  If this is true, then any meaningful rise in trading volume (on the buying side) due to added participation from the public could result in tremendous gains.  This thought sits in the back of our mind as we strategize the best way to take advantage while not being over exposed.”

The story on trading volume is somewhat murky, sometimes it matters and sometimes it doesn’t.  Learning to discern the two can be frustrating.  However, it is hoped that our work on the topic will help provide proper perspective.

Taking a step back, our prior work in trading volume should be reviewed critically.  Below are key articles that touch on the topic with the March 13, 2013 piece being, in our view, the most important real-time article on the subject:

Taking the Plunge

What is the best way to describe how trading volume has changed in the last eight years?  We would equate trading volume to the preparatory stages of what would be considered a successful competitive dive into a swimming pool.  There are three stages to a successful dive: 1) touchdown 2) maximum depression 3) takeoff.

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In the stock market, the “touchdown” in trading volume occurred in late September 2009 as the Dow Jones Industrial Average was in the recovery stage of largest stock market decline since the 1973 fall of –45%.  The “maximum depression” stage of trading volume lasted from the period of late September 2009 to mid-September 2014.  In terms of “liftoff” in trading volume, nothing has rivaled the amount of change that has occurred from mid-September 2014 to the present.

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On One Hand…

From all appearances, the stage is set for takeoff from a volume standpoint.  And yet, the stock market, as represented by the Dow Jones Industrial Average, since the 2009 low is already ranked seventh on the list of recoveries from prior crashes since 1835.  Can the market achieve the vaunted heights of 10 times the prior low as was the case in 1942 to 1966 or 1982 to 1997?  Considering that the period of the interest rate cycle corresponds to the 1942 period, we think there is a distinct possibility that “takeoff” is a possibility.

…On the Other Hand

As this has been the most hated bull market in history, which has seen it rise from 6,547 to as high as 21,115, or +223%, there are some elements that are cause for concern.  First, fulfilling the above three stages to takeoff are ultimately for successful dives.  Is the stock market setting up for a dramatic and steep dive?  Why would the stock market rise increase for 8 years on declining volume and suddenly spike on volume 3 times the 90-day average (No, it is not because of the Fed) in the last 4 months?

(Not So) Final Analysis

What would eliminate our questions about the nature of the current “liftoff” stage of volume? Well, we would have preferred a continuation of the stealth increase in volume that began in August 2014.  A stealth volume increases is far better because it would have continued the level of suspicion of the market increase.  Instead, parabolic increases fall into the category of pending and inexorable declines of large magnitude, after years of market gains.

How does an investor cope with the mixed signals of the market?  We believe that a concentration of assets is in order.  Pare down the non-staple holdings, focus on income and accept downside risk (we’re thinking semis, insurance and dollar stores).