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We should have seen it coming. At least that’s what many investors (both big ones and Robinhood speculators) are telling themselves right now with financial assets of all kinds in freefall this year. More than ten years of a bull market, a rush of Federal Reserve money, and a new world of technology in everything from money to cars to even art made the future seem limitless. Only now are some people discovering, many of them for the first time, that the laws of the market have not been repealed. Inflation, the war in Ukraine and rising interest rates are hitting the markets and no one knows when it will end.
The S&P 500, the stock index that’s likely to be in your 401(k), is down 19 percent this year to date. That’s dangerously close to the official definition of a bear market: 20 percent or more from the peak. Meanwhile, the NASDAQ, where the big tech names are traded, is down 28 percent this year, SPACs and cryptocurrencies have tanked, and private markets are grinding to a halt.
It’s no wonder that the search for the most important market signals that most people overlook has become a favorite pastime for financial experts who seek black humor as a balm for their losses. This list is far from complete, but from crypto stocks to meme stocks to SPACs and more, here are some of the signs that are making the rounds among investors.
Crypto is perhaps the most obvious place to look for long-lost signs that things had gone too far. For most of the past year, bitcoin seemed impervious to critics who called it a Ponzi scheme and to regulators around the world who threatened or enacted restrictions. In the end, however, the top of the market in crypto was predicted by one of the most famous curses in a financial bubble market: sand naming rights.
In early November, just as Bitcoin was peaking, the Staples Center in Los Angeles said it would change its name to the Crypto.com Arena after selling the rights to crypto.com for $700 million, which ESPN called “the deal.” of richest naming rights in sports”. history.” That was just a few months after cryptocurrency exchange FTX bought the naming rights to the Miami stadium where the NBA Heat plays. Such deals have become a red flag for investors who remember that Enron went bankrupt shortly after the high-flying energy firm got the naming rights to the Houston Astros’ ballpark The New England Patriots’ ballpark outside Boston was, at the tail end of the bubble of the dotcom, briefly called CMGI Field after a high-flying Internet incubator at the time, but within months, everyone agreed the deal no longer made sense.
Naming rights deals are “usually the crossroads of arrogance and arrogance and management creating their own bs,” says former financial journalist Herb Greenberg, who jokes that his decision last summer to abandon a plan to become an activist short-seller was also a superior market-indicator. After writing research for short sellers for several years, Greenberg moved on to the long side and took a job writing stock tips for a financial research firm.
Then there is the NFT craze. At Anthony Scaramucci’s SkyBridge Capital SALT convention last September, the former hedge fund manager and current crypto kingpin, though recently humiliated by heavy losses, Michael Novogratz brought up the chump Jeff Koons. balloon dog sculptures to explain the economic logic of NFTs, digital tokens on a blockchain that act as a certificate of ownership. “Because it’s him balloon dog worth $30 million? Because we say it is. We are doing the same thing with NFTs,” said Novogratz, CEO of Galaxy Investment Partners, a crypto investment firm.
(Not surprisingly, Koons, a former Wall Street commodity trader who honed those skills to sell his kitsch art, has also jumped into the NFT market.)
But the market top signal for NFTs came on January 5, just days after the stock market peaked. On that day, OpenSea, the dominant auction market for NFTs, reached a valuation of $13.3 billion. NFT sales have also collapsed, down more than 90 percent from the peak.
Meanwhile, OpenSea continues to sell Bored Ape Yacht Club NFTs, although prices have come down a lot. And recently, a CryptoPunk NFT that was bought for $1 million six months ago sold for $139,000.
While the Koon balloon dog The comparison may not be completely far-fetched, it’s also a classic example of the kind of thinking that tends to happen at the top of the market: smart people trying, on some level, to convince themselves that something that’s clearly overvalued might actually be underrated.. Read about any bubble in history and this kind of logic becomes common. However, in the cold, harsh light of late May 2022, it seems pretty clear: a mass-produced cartoon jpeg is not, in fact, a Koons.
The bubble was not just in crypto. The original meme stocks were the physical companies GameStop and AMC Entertainment.
But they didn’t turn out to be the classy revenge against Wall Street that garnered media attention after retail investors on the WallStreetBets sub-Reddit beat hedge fund Melvin Capital by learning how to squeeze deep-short stocks like GameStop. Although Melvin, who was short-lived at GameStop and AMC, hasn’t picked up and is now shutting down, the entire episode is something of a Pyrrhic victory for the Reddit team. A recent Morgan Stanley report found that retail traders who just started investing in 2020 were hit the hardest by the recent downturn since the market peaked.
Should we have seen his demise coming? Perhaps the digital billboards and banners floating from planes in the skies of New York and Los Angeles insisting on “AMC We Love the Stock” could have been a clue. These ads, paid for through GoFundMe accounts, began running when the stock hit a high of $60 a share last summer. Even after AMC CEO Adam Aron sold his stake in the lead up, AMC Apes continued to believe and continued to run their digital ads, most recently on the side of a mountain. Meanwhile, the stock market continues to fall. It’s down more than 50 percent this year, to about $12 a share.
“Ridiculous then, though maybe tragic today,” says Josh Wolfe, co-founder of venture capital firm Lux Capital. “TikTok accounts of young people talking about stocks, many of them buying options or investing through Robinhood in record amounts, and everything works for them, which virally induced social proof and their peers to accumulate too, none of them have idea of how to actually read an annual report, dissect a 10-K or 10-Q, reconcile a cash flow statement, or explain why WeWork’s ‘community adjusted EBITDA’ was basically a fraud.”
More than anyone else, venture capital entrepreneur Chamath Palihapitiya gets the credit and the blame for igniting the craze in special purpose acquisition companies, or SPACs. Palihapitiya’s first SPAC got off the ground when it merged with Virgin Galactic, Richard Branson’s struggling spacecraft company, in late 2019. Soon others joined the rocket launch, and Palihapitiya, anointed as the “king of the SPACs” by Bloomberg, would go on to sponsor ten SPACs.
But on February 21, 2021, just days after SPAC stock prices peaked, he sent out an enigmatic tweet: “I’m about to screw something up…just FYI.” (A Financial Twitter user who goes by @ItaliGino called this tweet the most obvious sign of the top, saying, “This was it…exactly.”)
Although Palihapitiya never clarified what he was referring to, losing money was probably not what he had in mind. Yet just three days later, he said that he had lost $1 billion that day alone as SPACs continued their decline. On March 5, Palihapitiya revealed that he had sold his entire personal stake in Virgin Galactic for a profit of $200 million. The general SPAC market has been in freefall ever since, including those sponsored by Palihapitiya. In February, he stepped down as chairman of Virgin Galactic.
As Wall Street lore goes, when the critics give up, the stock market has clearly peaked.
During the long bull market, short sellers faced one of the most difficult periods in their history and stopped trying to predict when the market would turn in their favor. Dozens of short sellers were then swept up in a wide-ranging Justice Department investigation that began last year (but has so far produced no indictments).
One after another, the shorts were removed. Andrew Left of Citron Research stopped writing short reports. A well-known perma-bear hedge fund manager, Russell Clark, told investors in November that he was closing his hedge fund, and he did so just before high-flying tech stocks began to slide, just as he had been predicting.
Then in January, Jim Chanos, who called Enron’s demise 20 years ago and repeatedly referred to the past few years as “the golden age of fraud,” changed the name of his fund from Kynikos Associates to Chanos & Co., silent. closing several of his funds and consolidating others.
Although Chanos’s assets had dwindled from several billion dollars at their peak to less than $300 million by the end of the year, the legendary short-seller is still in the game. So far, 2022 looks like a very good year for him.