Market Insight

The Anatomy of a Bubble Revisited: How High?

We believe three factors drive stock prices: fundamentals, technical analysis and human behaviour (market psychology). Fundamentals tend to play out and are the driving force of long-term results, technical analysis can help you manage the turn, but flow in human behaviour can dominate all else and drive prices far beyond rational explanation.

Just think back to the start of this year when Bitcoin was coming off a rise of 1,403% in 2017. It is now down 65% from those highs. Did the fundamentals change or did market psychology hit a tipping point? During the euphoria for crypto investors, we penned an Ethos titled The Anatomy of a Bubble. In it we highlighted the common ingredients to a bubble including the ease of money, access to leverage, new technologies, changes in regulation and broad public speculation.

At the time, Bitcoin had many of many of these ingredients, and we now see numerous similarities happening in the Canadian cannabis industry. Regulation is changing, access to capital is bountiful, and there is broad market speculation.

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Market Insight

As facts change, so do our views

We have been long-time proponents of rising rates, that equity portfolios should be tilted heavily toward cyclical yield and limit exposure to interest rate sensitive companies.

 
Cyclical yield companies are more sensitive to economic activity, meaning if yields are moving higher due to better economic data, they react more positively. In contrast, interest rate sensitives are the opposite, moving higher when yields fall (usually due to softer economic data) and decline in price when yields rise.

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