Why you shouldn't short the Bitcoin and Amazon bubbles


Make no mistake – Bitcoin and Amazon are in bubbles. These securities have lost all connection to their underlying value, and euphoric investors are buying simply because of a “good story”. We all know how bubbles end – the price drops precipitously.
Read our post on large cap overvalued tech stocks.
No sane investor should buy Bitcoin or Amazon at the current price, unless you’re a “long term investor” who is willing to wait 5-10 years to just to break even.
However, that doesn’t mean you should short Bitcoin or Amazon either. Many traders are short right now. Perhaps they are right and this is the top of the bubble. But based on historical observations, they are likely wrong. The market can stay irrational longer than you can stay solvent.
Shorting bubbles is a dangerous game. You might not be far from the top in terms of number of days, but you might be far in terms of percentages. E.g. you might only be 2 weeks away from the top, but the market might soar another 20% in the meantime.

Why Amazon won’t stop at $1000

95% of traders are short here at $1000. In a sense, $1000 is too easy of a short target. When things are too easy, they don’t tend to work. Bullish investors can easily push the price higher and trigger a lot of stop losses.
History shows that the market doesn’t usually top at a beautiful round number like $1000. The market tends to overshoot these multiples of 10. For example, the 1990s NASDAQ bubble didn’t peak at 5000 exactly. The NASDAQ peaked at 5132.
Based on this projection, Amazon will likely exceed $1000 before it tops. Amazon’s momentum is too strong right now.

The Bitcoin and Amazon haven’t topped yet

History shows that every “parabolic move” has a massive shake-out within it. The market doesn’t soar from beginning to end in one straight line. Instead, there are usually a couple of big red bars on the daily and intraday charts, followed by new highs before the bubble ends.
Bitcoin is making a massive consolidation right now. It likely has one more leg higher. Amazon has yet to have a massive shake-out.
Here is a daily bar chart for Bitcoin-USD.

Here is a daily bar chart for Amazon.

Here are some historical examples of bubbles. We can see that across various assets, bubbles don’t go from beginning to end without stopping. There are pauses, consolidations, and corrections within the parabolic phase.
Apple
*Apple didn’t top at $100 in 2012. $100 is the price after Apple split its stock 7 for 1.
Apple’s parabolic bubble in 2012 had 2 legs. Its stock soared from November 2011 – April 2012. Then it made a big correction. Then it rallied again and topped in September 2012. This is a weekly bar chart.

NASDAQ
NASDAQ’s late-1990s bubble didn’t end on the first downturn. NASDAQ had a volatile consolidation in January 2000. Then it soared again before topping in March 2000.
Here’s a weekly chart for NASDAQ.

China
China’s stock market soared in 2015. That bubble had no connection to fundamentals. China’s economy was deteriorating in 2015.
As you can see in the following chart, China’s SSE Index had a big correction in January-February 2015 and another big consolidation in May before it topped in June 2015. Bubbles don’t die immediately because there are enough irrational investors to “buy the dip”.

Japan
The Japanese stock market was in a bubble in the late 1980s. However, you can see that there were many consolidations, pullbacks, and corrections in the Nikkei 225’s parabolic phase from early-1988 to late-1989.
Here’s a weekly chart for the Nikkei.

Bottom line

Bubbles are easy to identify, but bubbles tend to kill both longs and shorts. Longs lose their shirts because they’re on the wrong side of the market, but shorts can also lose their shirts if their timing isn’t impeccable. It’s impossible to be consistently perfect on your timing.
This is why we only buy and sell the S&P 500’s ETF’s. We don’t trade individual stocks. The broad index doesn’t suffer from the same irrationality that individual stocks can suffer from.
We don’t know what will happen to Bitcoin after its bubble bursts. But we do think that Amazon’s stock won’t be dead after its bubble bursts. Our model states that the U.S. stock market is still in a bull market. Hence, “growth story stocks” like Amazon will eventually be bought. Perhaps Amazon’s stock will do what Apple’s stock did after 2012:

After a massive run-up, Amazon will make a massive correction. (Apple’s stock fell 45% from September 2012 – April 2013). Then Amazon’s stock will go up with the rest of the stock market because the bull market isn’t over. But Amazon won’t rally as fiercely as it did before.

Amazon is a solid company. It merely needs to reconnect with its underlying fair value.

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