When discussing technical analysis and trends, the erudite snoots among us, which unfortunately can include me, like to talk about physics. Objects, or trends, in motion will stay in motion unless acted upon by an outside force. That’s inertia and yes, markets have it. How else do we explain momentum stocks, let alone bubbles?
As the old Faberge Organics shampoo (with wheat germ oil and honey) commercial used to say, “If you tell two friends, then they’ll tell two friends, and so on and so on and so on.” The same goes for the markets. It’s the ultimate expression of keeping up with the Joneses. Everyone covets everyone else’s profit-making assets
Trends exist because investor B wants in on the action of investor A. But why?
My reasoning is that trends exist because information flows around the market imperfectly. Some people get it sooner and others later. Some people act aggressively and some not at all. Eventually, everyone assimilates the information but guess what, the market is already way up by then. But that’s another topic.
If not for this fact, stocks would only trade the bid-ask spread until the next news or earnings report. They would then jump or fall, in one fell swoop, to the next price level where they would trade around the new bid-ask. It is the imperfect flow of information, either lagging or leading when someone figures out the news before it is releases, that allows smooth trending.
Nowhere but in the financial and commodity markets do people want to buy more as the price goes higher. My economics 1a professor, Barney “guns and butter” Schwalberg would not approve. Yet, in the markets, the more people that want it, the higher the demand and higher the price, and (drum roll) the more other people want it.
Talk about FOMO!
With that said, there is still a bit of sanity left here. If prices rise too fast – and that is clearly subjective – then some people wake up and realize they should probably cash some of this windfall in. Supply increases and sure enough price action heads a bit lower.
This could happen a few times and the market establishes a sustainable trend with a velocity that makes sense for that market at that particular time in history.
Right now, Bitcoin merits an insanely steep trend. It’s new and, as far as a concept can be, really shiny. Maybe next year, when $30 million simply vanishes as it did just this month in competing crypto-currency ethereum, we’ll see the market’s invisible hand show itself.