"Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little."
―Fred Schwed Jr.
Holiday seasonality worked exactly like it was supposed to last week. The indices did well, but what really stood out were the pockets of strong action in many of the cryptocurrency and bitcoin plays. Traders went on a rampage in the group and caused crazy moves in names such as Riot Blockchain Inc. (RIOT) , Xunlei Ltd. (XNET) , Overstock.com Inc. (OSTK) , US Global Investors Inc. (GROW) , Social Reality Inc. (SRAX) and LM Funding America Inc. (LMFA) , among others.
While the number of stocks in this sector is very small, the speculative frenzy in bitcoin, which is now approaching $10,000, has an impact on the broad market. When there are such huge moves and big profits, traders tend to look for other opportunities, and that helps to keep a bid under the market. When you are making money in some very questionable small-caps, then the risk in other parts of the market doesn't seem that bad.
Typically, after a good Thanksgiving week the indices will be weak on Monday. Some profit-taking and consolidation is normal, but one thing this market hasn't been for a while is normal. The usual ebb and flow of emotions doesn't apply like it once did. Instead, we tend to have very aggressive dip buying, which leads to extremely strong underlying support. Pullbacks are never a cause for concern. They are always just another buying opportunity.
One story we are sure to hear today is how the frenzy in the cryptocurrency and blockchain plays is similar to the Internet bubble back in 1999-2000. The fundamental basis for these moves is very questionable at best, but the frenzy of buying is drawing in a crowd of folks who don't want to be left out.
There is no question in my mind that the cryptocurrency frenzy will end badly, but trying to guess when and how is impossible. It is much like a Ponzi scheme. As long as there is a willing supply of buyers, these names can run to ridiculous heights. However, when new money stops flowing into the group, the destruction will be brutal.
The reason frenzies like these work is that traders are confident they can escape when the turn does occur. Some do, but many end up being caught by surprise and are too quick to think a bounce will save them.
If you are playing the crypto/blockchain game, make sure you are locking in some gains along the way. The goal is to limit risk when you have a big profit.
The indices are mixed in the early going. Weakness in China was an issue, but anticipation of a historically weak Monday following Thanksgiving is keeping market players sidelined in the early going.