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Market Lab Report (MLR) - Economic Lockdown, ie, "House" Arrest = Beneficiaries: Stocks, Gold, and Bitcoin

Market Lab Report / Dr. K's Crypto-Corner

by Dr. Chris Kacher

The (R)Evolution Will Not Be Centralized™


Second Order Aftershocks

As I've written, second order consequences of the economic lockdown are numerous. Demand shocks across various industries are inevitable. On Monday, we saw crude oil make pricing history. Storage capacity of oil went to virtually zero along with a demand shock for oil caused by the economic lockdown. Many of the world’s major economies have sent crude demand tumbling by as much as a third, leaving the industry facing what Jefferies analyst Jason Gammel called “the bleakest oil macro outlook” he had ever seen.

West Texas Intermediate (WTI) Crude Oil prices for future delivery have risen well above the spot market—a situation known as contango—and that can encourage traders to store oil. West Texas Intermediate has been a major price mark since the early 1980s. It lost more than 250% on Monday to trade as low as -$40.32 a barrel in a day of chaos in oil markets. Traders capitulated as a chart shows it going to subzero after relatively normal trade since the early 1980s.

U.S. crude was in the largest contango ever seen. Normally, future oil prices in forward months are below current prices. Today, the situation is the opposite. According to Michael Lynch, president of Strategic Energy & Economic Research, “The historic contango is a reflection of physical barrels that can’t easily find buyers and are being sold at distressed prices. The implication is that storage might be more full than thought." Landlocked Canadian oil producers who don't have easy access to expandable tanker storage were paying their customers to take the oil off their hands.

The global economy will continue to plummet but markets will price in a sharp bounce in Q3. So any sharp pullback due to second order effects that weigh on the economy could potentially be a buying opportunity as QEInfinity pushes capital into stocks that help the major averages find a floor. That said, we won't know until we get there. Each day brings new data, thus price/volume action on a day-to-day basis remains key despite all the noise from the mainstream media.

Dow Up/Down 500 - Fallacy of Headlines

As concerns how how mainstream media uses the Dow Industrials to paint exaggerated pictures, they often report, "Dow up xxx" which is usually 300 points or more to underscore how well or awful markets are doing. Yet a stock chart illustrates how small this is in context with how large volatility has been. 

When the Dow was near 30,000, a 300 point move was 1%. The percentage moves are what are important, not the points, and must be taken in context with current levels of volatility. The current bounce could continue for longer than expected in this environment of limitless liquidity.

In a similar vein, mainstream media loves to jump on bitcoin when it comes to price moves, as if they are equivalent to moves in the major averages. A log plot (I will provide) shows how a 46% correction in the S&P 500 is massive relative to its prior uptrend while a 50% correction in bitcoin is a tiny blip.

A recent report by Bloomberg shows how bitcoin is gaining adoption and starting to correlate more closely with gold though I would add bitcoin has asymmetric upside to gold since bitcoin has a history of exponential growth.

Bitcoin Bathwater Babies

When everything including gold and bitcoin plunged in March, it was reminiscent of late 2008 when gold lost one-third of its value. But some of my metrics signaled at least an intermediate low in bitcoin on March 13 which was the first to rebound compared to gold and stocks as I wrote on March 17.

First, what helped bitcoin bounce was the bitcoin miners energy ratio hit an extreme buy zone. This is the ratio between bitcoin's market cap and its energy consumption. This was the first time it had done this since 2016.

Second, the bitcoin hash ribbon started to recover while the weaker miners were put out of business leaving only the stronger miners. This reduces selling pressure.

The bitcoin difficulty ribbon is a metric that shows miner selling pressure pushes the price of bitcoin lower. When network difficulty reduces its rate of climb, this means there is less mining competition as the weaker miners are going out of business. The remaining stronger miners need to therefore sell less of their coins to remain operational which leads to less selling pressure. This metric's buy signal comes when the ribbon compresses. The ribbon consists of simple moving averages of bitcoin network difficulty so the rate of change of difficulty can be easily seen (as I will show on a chart in an upcoming report).

Another bullish metric I use is the unspent transaction outputs of bitcoin. A chart (I will send) shows how this had a steep uptrend in 2017 into the climax top. It has steadily increased since late 2018.

Underscoring this is the number of bitcoin addresses with a non-zero balance is near all-time highs. The number of bitcoin active addresses shot higher in the first half of 2019, eclipsing the prior peak in 2018 despite the price of bitcoin still well off its highs.

The bitcoin halving event is also coming this May. In prior times, this was bullish before and after for bitcoin. It is simply illustrative of the law of supply and demand. Supply halves but overall longer term demand continues to grow.

Meanwhile, bitcoin's hash rate continues to trend higher overall.

Bitcoin's volatility is also near lows which has traditionally provided a floor of support for bitcoin (as I will show in a chart).

A recent report illustrated how bitcoin is maturing, slowly but surely. Indeed, an increasing futures open interest is another indicator of adoption. (A chart I will include shows how overall open interest has been increasing despite the bear in 2018, then another correction in the second half of 2019).

So while the global economy sets all-time record lows across various metrics, the virtual QE-money printing machines continue at supercharged speed which will continue to be bullish overall for gold, stocks, bonds, and bitcoin.

Potential Stocks For Watch Lists

While sharp corrections from second order effects will come, stocks to keep an eye on for potential entry points during such corrections are the new alt-currency names such as AAPL, GOOGL, and AMZN, all which are involved in deep AI research as well as healthcare. Despite the questionable way the economic lockdown was carried out, COVID has spurred the development of various healthcare protocols. AAPL's Tim Cook made waves in January 2019 when he said, “If you zoom out into the future, and you look back, and you ask the question, ‘What was Apple’s greatest contribution to mankind?’ It will be about health." Some have suggested AAPL's growth is limited to iPhones and iPads while neglecting to acknowledge the wearables and digital health data market, from its electrocardiogram-equipped Apple Watch to digitized medical records. Consumer health is a growing target of Apple’s massive R&D investments which allocates a billion-dollar monthly budget. It is also focused on sensor technology currently capable of detecting atrial fibrillation among other health indicators. Its software together with full-scale machine learning systems will monitor how we live to provide personalized, preventive guidance.

Meanwhile, GOOGL has 57 digital health startups in its portfolio across genomics, clinical research, and infectious diseases, among others. Google Health now has more than 500 employees in just over a year.

Other healthcare companies that have showed much greater relative strength than the overall market should be included on one's potential buy list for when the market corrects then finds a QE-floor. This includes LVGO which had a pocket pivot breakout off its 10dma on Thursday. LVGO provides digital health devices that monitor chronic health conditions. DXCM had an extended pocket pivot on 4-17-20 so watch for a constructive pullback though it reports earnings this coming week. DXCM monitors the glucose levels of diabetics. TDOC which is hitting new highs provides online healthcare services with over 3000 board-certified physicians. TDOC had a V-shaped bottom then issued an extended pocket pivot relative to this V-bottom so watch for a constructive pullback.

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