In any case, do not "ignore" Friday's big drop.

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On Friday, US stocks underwent intense sell-off, with the Nasdaq index dropping about 3.3% by midday, and Bitcoin simultaneously plunging to around $60,000—down 16% over the past 5 trading days, and an accumulated decline of about 42% over the past 12 months. The group that has spent the past few months explaining that "valuation doesn't matter" suddenly began to ask what's happening.

The well-known financial blog QTR's Fringe Finance wrote a warning: Don't treat this decline as just another buying opportunity amidst a dip. The current valuation levels, the Fed's predicament, and the structural fragility of the market are entirely different from the "every dip is rescued" environment investors have grown used to over the past 15 years.

A 3% Drop Is Still Far From "Cheap"

The article provides a basic reference: In 2023—just three years ago—the Nasdaq index was more than 59% below current levels.

Valuation data is even more alarming. The current Shiller CAPE (cyclically adjusted P/E ratio) stands at 42.7, while the historical average is only 17.38, and the median is 16.09—the current level is more than twice the centennial average, approaching the highest point on record: 44.19 in December 1999 at the internet bubble peak. He reminds, "That period was not known for rational pricing or outstanding long-term returns."

The Buffett Indicator is equally troubling. The total market value of US stocks is about $75.4 trillion, corresponding to an annualized GDP of about $31.8 trillion, with an indicator reading as high as 237%. Historically, whenever this indicator reaches such extreme levels, investors eventually discover—sometimes painfully—that valuation matters.

A 3% decline may seem dramatic on social media, but in the face of historically extreme valuations, it doesn’t even count as a scratch.

What Makes This Time Different?

In the past 15 years, every meaningful market drop has been accompanied by an expectation: that the Fed would eventually step in with rate cuts, liquidity injection, or some kind of monetary "painkiller." Now, this safety net is much thinner.

The article points out that the Fed is caught in a dilemma: Inflation remains stubbornly high; aggressive rate cuts risk reigniting inflation, while maintaining tight policy could drag the economy down further. "The market may be eager for a rescue, but inflation may not allow it." This is a situation investors haven’t experienced in a long time.

The structural fragility of this market cycle is also intensifying. Below the surface of the indices, market breadth is far less healthy than bulls are willing to admit—a handful of stocks have borne a disproportionate share of the gains. QTR has previously advised that holders of S&P 500 ETFs (SPY) should also monitor equal weight ETFs (RSP) for a more genuine assessment of overall market conditions.

Leverage and margin debt have expanded throughout the system, and options-driven flows have become a significant source of market support. The gamma effect of market makers suppresses volatility when the market is rising, creating an illusion of stability—but the same mechanism can operate in reverse: When positions begin to close, liquidity evaporates quickly, leverage is reduced, momentum traders rush to exit, and "the steady staircase upward suddenly turns into an elevator drop."

QTR has long regarded Bitcoin as the "tip of the spear" of risk appetite—it’s the first to be flooded when liquidity is abundant and speculation prevails, and the first to collapse when risk appetite wanes. Last October, he included cryptocurrencies as one of ten market areas to be particularly cautious about, and advised investors to closely monitor the other nine as well: "The market rarely contains problems in a corner of the casino for long."

The article concludes by emphasizing that this doesn’t mean a crash is imminent. But with valuations approaching historical extremes, a Fed constrained by inflation, and fragile market structure, one should not assume every drop is a "gift." That mindset worked in times of lower valuations, abundant liquidity, and a Fed always ready to rescue the market—but those conditions no longer exist today.

The author warns that at current leverage levels, it doesn't take many catalysts for a leverage-driven selloff to redefine people's understanding of "rapid decline."

Risk Warning and DisclaimerThe market is risky, invest cautiously. This article does not constitute personal investment advice, nor does it take into account the special investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Investing based on this is at your own risk. ```