Return of the Return of the Nihilists?

I ran into a problem this morning.  I wanted to title today’s piece “Return of the Nihilists?”, but it turned out that I wrote a piece with that title in August 2022.  That was a follow-up piece to a February 2020 piece entitled “Confessions of a Market Nihilist”.  Nihilism seems to be a nagging theme with me, particularly when we get into a market environment when we see indiscriminate, enthusiastic buying powered by FOMO.  That said, the timing of those prior pieces proved auspicious.

In February 2020, while noting that stocks were inexorably rising despite increasing concerns about the newly spreading coronavirus, we defined the term thusly:

It is for that reason that I now consider myself a “market nihilist”.  For those with neither a philosophical bent nor a love of “The Big Lebowski”, allow me to define the term.  Nihilism, derived from the Latin word for “nothing”, is defined as a philosophy of “extreme skepticism maintaining that nothing in the world has a real existence.”  While I hardly espouse that view in my daily life, I have come to realize that if we substitute “market” for “world” in the prior definition it pretty well sums up my attitude towards recent market activity.

I began using the term “weaponized FOMO” around the end of the prior year.  The reasoning was that institutional investors needed to avoid being left behind by the bounce that began at the beginning of November, that led to the “F” in FOMO, “Fear”, being an important driver of market gains.  I used the term once more in a recent TV appearance to help explain why it seems that investors large and small are seemingly chasing an ever-narrowing list of market winners.  If the broad market’s performance is being driven increasingly by a narrow cadre of stocks, then investors feel the need to weigh those names more heavily in their own portfolios, and momentum traders follow in their wake.  That leads to a feedback cycle – one we’re seeing now.  It’s virtuous while it’s working, treacherous when it’s not.

Yet if one is buying simply because things are going up, is that a sound rationale?  It certainly can be for the aforementioned momentum chasers, especially if they are disciplined about risk management.  (Check now to see if the latter condition applies to you.)  But doesn’t it also imply a certain degree of nihilism if you’re buying something simply because it’s going up, regardless of reason?

The obvious current poster child for nihilism is bitcoin.  It seems to rise a few thousand dollars each day, with the proximate cause being the money flowing into the newly listed ETPs that track the product.  But when I wake up on Monday morning, well before the US stock markets open, and see bitcoin up by $3000, or roughly 5%, it is far more likely that crypto traders are either front-running potential inflows, not responding to them, or simply chasing what has now become a very powerful rally.  By the way, we see far more customer activity in crypto-related stocks and options, such as Marathon Digital Holdings (MARA) and Coinbase (COIN), than we do in the ETPs, despite their net inflows.

One might argue that it is worth chasing, say, Nvidia (NVDA), thanks to its recent track record of beating expectations, raising them, and beating the newly raised expectations in the next quarter.  On a trailing P/E basis, NVDA seems expensive (~70), but on a forward basis (~35), it’s not atrocious considering its projected growth rate.  For something like Super Micro Computer (SMCI), where the move has been almost parabolic, today’s 25% rally on the news of its upcoming inclusion in the S&P 500 (SPX) may be a bit excessive, but it is impossible to shrug off.  (Traders with long memories may want to remember that Tesla (TSLA) had a similar trajectory up to and including its own addition to SPX, which became a phenomenal “sell-the-news” moment for many.) 

Sure, it’s understandable why the chase is on, but less understandable why it is so turbocharged – particularly for cryptos.  Trend-following can be a profitable strategy.  Blindly chasing performance tends to be more fickle and less strategic.  Consider carefully in which you might be engaging.