Market Lab Report / Dr. K's Crypto-Corner
by Dr. Chris Kacher
The Metaversal Evolution Will Not Be Centralized™
One may remember that Powell started hiking rates in 2016, then accelerated hikes from 2017 to 2018. The discount rate rose from 1% at the end of 2016 to 3% in 2018 before markets finally started into a deep correction. While both stocks and cryptos rose strongly in 2017 despite the rate hikes, the dollar weakened all year until 2018 when it then strengthened for most of the year. 2018 was deeply corrective for both stocks and cryptos. We are currently seeing another strong uptrend in the dollar (first chart below) since the middle of this year which can been a headwind for cryptos as less QE means less capital flow into cryptos. You'll notice the green and red arrows inversely correlate between the dollar and the price of bitcoin, though bitcoin and cryptos have somewhat bucked the stronger dollar this year due to institutions piling into bitcoin and crypto which has created a wide price band in bitcoin.
But today, contrary to 2017, the amount of debt is far greater with C19 having accelerated M2 by 40%. In consequence, Powell has far less room to hike rates. The yield curve is much closer to inverting compared to 2017. Just the idea of tapering without a hike is pushing the major averages into a potential correction. While the market is pricing in 2-3 rate hikes for 2022, even the first 25 basis point hike could be an issue due to the massive debt burden.
Nevertheless, the global trend has been to tighten since more than a billion people live with double digit inflation which is destroying savings accounts and the middle and lower classes. A number of countries have started to tighten including the UK, South Korea and New Zealand. The counterbalance is cryptotechnologies which transform old school legacy systems into far more efficient platforms at far lower cost while removing unnecessary layers.
But in the meantime, given persistent and soaring inflation and the global trend towards tightening, Powell is more likely to hike sooner than later. A number of major central banks including the Bank of England have started to tighten. Along with soaring PPIs in the U.S. and UK, Germany's PPI came in at its highest level in 70 years. Omicron is also looking as if it causes far fewer fatalities which, if such is the case, will give the Fed further room to hike since the less fatal Omicron implies C19 restrictions will lift sooner than later. A lifting of C19 restrictions would induce more spending vigor which would push inflation higher. Further, Biden's BBB plan may have been reduced down to $1.5 T. Still, despite tapering and tightening, the markets could move higher in a choppy manner since a huge amount of QE is still pumping into the system. As seen in 2017, it took a number of rate hikes to induce a sharp correction in the market. Given the flatness of the yield curve at this time compared to 2017, I would expect markets could correct by -20% or more due to either the tapering in effect which ends around May which makes way for the first rate hike potentially in May based on futures markets, but the markets may chop higher in the meantime. Leading altcoins in the blockchain space could use such brief periods of higher prices to vault much as we have seen a couple times since July of this year such as with SAND, MANA, MATIC etc. Expect riptides ahead.
Bull vs Bear Cases for Blockchain
Some of my notes on market direction for cryptos:
=whales are HODLing or buying dips
=the last time retail bought the dip this hard was at the bottom of the c19 crash in mar-2020
=PDL oscillator suggests bottom is in- PDL analyzes the demand from speculators on derivatives exchanges and has detected a bottom that is strengthening, which also reveals a hidden bullish divergence.
=BTC valuation $60k
=supply shock demand
=on and off chain metrics much stronger than in 2014 and 2018
=price well below supply shock valuation
=most selling is tax loss / carries
=Asia selling has driven market, which will ease after eoy when Huobi/OKex have removed majority of mainland users (12/31 futures were already force majeured). Li Lin stepping down fits with this.
=Global central banks are tightening; The U.S. Fed is tapering $30b each month. The first taper was done in Dec which reduced bond buying from $120b to $90b. At the present rate, bond buying should end by March. Of course, Powell has said it will all depend on the data going forward whether he has room to do this.
=DXY soared in 2014, 2018, and now in 2021 again + the Fed tapered starting in Jan-2014, both which resulted in crypto bear markets. Since June, DXY has been in an uptrend BUT DXY has brief periods where it moves sideways which enables BTC and leading alts to soar in a matter of several days to a few weeks. Note, the timing of a sideways DXY is not 1:1 with crypto but shows that a sideways move in DXY can lead to material jumps in price in leading alts, ie, this is not 2014 or 2018. Expect continued choppy, riptide markets with bounces where the leading alts (MATIC, SAND, etc) may continue to outpace in price.
The major averages as well as crypto markets have been in a corrective phase. The length of the correction is unknown as it will come down to Powell reversing the double taper or any future rates hikes, but if history is any guide, a 20% correction in the majors may be sufficient for Powell to cry uncle and stop the tapering, unleashing the wild horses of accelerating QE once again, as 20% has been the level numerous times, with C19 being the only time the correction exceeded 20% due to the Covid-induced market crash.
Q: What position sizing strategies do you guys use or recommend? For a 100K account, what would be the range of position size and the stop loss professional investors like you use? I am always afraid taking larger positions and would love to learn how to size positions and manage for low risk and high profitability.
A: It comes down to trading personality. Some such as Bill O'Neil or Lee Freestone preferred only a few positions so he could watch them closely. I preferred having typically 12-16 positions. Bill initially didnt believe good returns could result because he considered this too many positions, but in a good bull market, one can spread the risk without hampering upside returns. That said, it depends on the market. In crypto in June 2017, this was the mini-top. Only one crypto was bucking the trend, Neo, which was called Antshares in those days. Despite alt coins losing typically 1/3 to 1/2 of their value from June over the next several weeks, Neo continued to forge higher. I went all in knowing that since crypto does not ever close but trades 24/7, major gap ups or gap downs are nearly non-existent for quality cryptos. As Neo shot higher in the ensuing weeks, I then spread part of the profits into other alts which started to offer logical entry points.
With stocks which can lose 50-75% overnight known as the gap down risk, I intentionally kept my position sizing to a maximum of 25% of my portfolio, where eight positions on full margin would be the target. If a stock doubled, I would not sell it, but know it had become an overweighted component but with a huge profit cushion which was okay. In practice, since I would dynamically reduce the position size in the slower horses and use the capital to buy faster horses, I would typically end up with 12-16 positions as a bull market unfolded.
That said, each must find what works for their trading personality when it comes to position sizing.
Q: For BTC, do you use the 10DMA (or 20?) for selling? BTC is more volatile so 10 might get you out too soon.
Also, for buying BTC, you look at key levels, volume and attempted rallies. To identify a rally, in stocks you used the 1.5% rule (increased volume + 1.5% increase). BTC is again more volatile, do you have a more appropriate number?
A: With crypto, I dont use most indicators I would use in stocks. I instead watch BTC and ETH very closely. One often leads the other. As where ETH goes, so go the altcoins. I am always scouring for liquid altcoins which are showing strength either by resisting a downtrend when BTC or ETH are weak or outperforming both BTC and ETH during uptrends. To find potentially outperforming coins, you can do a regular search on www.coingecko.com by arranging the coins in order of performance over the last 24 hours and 7 days. I do this for the top 200 coins, but generally buy in the top 50.