Major market indexes came unraveled this week as the NASDAQ Composite breached its 50-day moving average on Friday while the S&P 500 sits just below its own 50-day moving average after stalling and reversing at its 20-day exponential moving average early in the day Friday. The Dow is attempting to hold deep support along its 200-day moving average but closed down for the fourth week in a row nevertheless. The broader NYSE Composite Index ($NYA) closed the week below its 200-day moving average in a vain attempt to regain the line early in the day on Friday. It is representative of the broader situation with individual stocks as a multitude of leaders have broken down in waves over the past 2-3 weeks. There has been no reason to be long this market, and most investors are likely being forced out as selling guides are triggered. This is good reason why the Focus List has gone without a single name for a record long period since this website was relaunched in 2010.
Meanwhile, the Market Direction Model (MDM) has been able to capture intermediate term trends as it sought to do since Dr. K made key adjustments on Feb 7, 2019 (as shown in the results section table) to account for changes in market behavior much due to QE. The MDM switched to a BUY signal on Monday, November 29th and then back to a CASH signal on November 30th where it currently remains. One must remain nimble as a number of "perfect storm" cross currents from tapering to inflation to C19 mutations to a very weak jobs report to another Evergrande flare-up vs. QE money printing create rip-tides.
The sharp correction in bitcoin and other cryptos was due in part to this "perfect storm" but also due to futures open interest and related metrics which signalled the overcrowding of longs, so, once again, the sharp correction of bitcoin and cryptos was initiated by this factor, rhyming with the numerous sharp corrections seen this year induced by whales which trigger liquidations when too many longs or shorts crowd the plate. They then scoop or short the wicks, depending. Crypto Reports has discussed this in some detail. Expect more such whale-induced corrections to occur.
The crypto hype cycle also remains alive and well. It was big in mid-2013 when bitcoin was pumping and was my (Dr. K) first real-time observation of how mainstream gets it wrong on many levels in both directions when it comes to bitcoin. Then again in 2017 due to skyrocketing cryptos and in 2019 when there was renewed hope, and here we are today. Over the years, there have also been a number of times when bitcoin was FUDded to bits and metrics suggested a bottom was near as they do now via off- and on-chain metrics. That said, nothing is 100% since trading is all about probabilities, and a deeper stock market correction could easily yank down crypto.
As noted last week, numerous meaningless news events, from certain U.S. city mayors taking their salary in Bitcoin two weeks ago (good for a 30% pay cut!) to third-world El Salvador issuing Bitcoin bonds (an arrangement that works out very well for those issuing such bonds when $BTCUSD declines as it has) and talking about creating a "Bitcoin-City" are pumped up in the media. Instead of getting caught up in the hype, use some common sense here. El Salvador is a tiny country with a GDP of slightly under $25 billion. The idea that it will suddenly rise to global economic and financial prominence by embracing all things Bitcoin while still suffering from pervasive poverty and inequality combined with 15 percent unemployment and significant underemployment, as well as related problems of crime and violence that have plagued the country since its civil war is absurd on its face. It is akin to putting big, fat slick drag-racing tires on a scooter in the hopes of turning it into a top fuel dragster. In the end, it is still just a scooter.
What is notable is the trend taking place. Other countries are looking to follow suit because of the potential rise in El Salvador's GDP due to bypassing the onerous fees for remittances, a $540-billion dollar industry worldwide. Western Union's take can easily be 40% of a small transfer. As a borderless payment system, transfers made in Bitcoin would keep much of those earnings in people’s hands. To start, 2.1 million bitcoin addresses have been registered in El Salvador and that number is growing. More people now have bitcoin wallets than savings accounts. In addition, the efficiencies gained by using bitcoin as a way to transact value overcomes the inefficiencies of legacy banking much as developing countries that did not have wired phones jumped right into wireless mobile.
Further, global M2 money supply is fast expanding. With a far greater and accelerating supply of dollars, euros, shekels, purchasing power is dropping at an accelerating rate. The great debasement of fiat remains well in place. World reserve currencies have a limited lifespan. Bitcoin remains the only store of value that has a fixed supply. In consequence, the odds are growing in the coming years of a greater number of weaker fiat succumbing to double digit inflation. Here is a good interview on the matter. 1.1 billion people live with double digital inflation not to mention issues in the U.S., UK, and EU which, all told, is destroying billions of lives and livelihoods. These government statistics probably underestimate the real inflation much as the U.S. still claims inflation is just a few percent when it's actually 15% or more. The average cost of food is soaring. For example, in the UK, prices jumped by 27% over the last 12 months.
Meanwhile, the media have recently begun to pitch the line that crypto-currencies "belong in everyone's portfolio." Others have extolled the virtues of Bitcoin as being a "cheaper way" to transfer large sums of money around the globe. Of course, one must hope that if they do transfer money in Bitcoin overnight, it doesn't decline 20% as it did Friday night, so the practical value of transferring money around the globe with Bitcoin is nil unless smaller amounts are automatically converted into a more stable fiat which is a practice used by some businesses that accept bitcoin, or until Bitcoin's volatility bleeds out which happens as an asset matures but this will take many years. Somehow, when the media finally gets this gung-ho about something we tend to think that its shelf life may be getting a bit short, at least in the near-term.
Indeed, in conjunction with the hype, Bitcoin ($BTCUSD) objectively topped on a technical basis four weeks ago, offering one last short-sale entry at the 20-dema on Friday before plunging lower. Last weekend, in this same report, we reviewed the anatomy of the top in $BTCUSD and so far there is zero evidence in terms of price/volume action to indicate that a low has been put in yet. Overnight on Friday a flash crash sent $BTCUSD below its 200-dma where it sits at the time of this writing on Saturday morning.Ethereum ($ETHUSD) posted a double-top early in the week, which also serves as a typical short-sale set-up in this current market environment for stocks as well, and has now broken below its 50-day moving average. It split wide open Friday night with $BTCUSD and has undercut prior November lows in a U&R attempt. While this would have signaled a cover point for any short-sale position in $ETHUSD taken on the double-top set-up on Monday, it may simply result in a normal reaction move back up into the 50-day line which would then serve as a potentially opportunistic short-sale entry point until and unless $ETHUSD can regain the 50-dma.
Coinbase Global (COIN) triggered a short-sale entry as it broke below its 20-dema last week, which was also a sell signal for any long positions in COIN, as we discussed in last weekend's Focus List Review. As if things couldn't get any worse for the stock, it has now plunged through its 50-day moving average, triggering a secondary short-sale entry at the 50-dma on Thursday before breaking lower on Friday. At this point is has virtually erased all the gains achieved following the pocket pivots its posted along its 20-dema and 50-dma back in early October. Easy come, easy go.
We have also seen severe breakdowns in other crypto-related stocks such as Bitcoin miners Marathon Digital Holdings (MARA), Riot Blockchain (RIOT), and former software company Microstrategy (MSTR) which has been transformed into a one-trick pony Bitcoin holding tank by its CEO who has now become one of the High Priests of Crypto, and crypto-banker Silvergate Capital (SI). These names correlate highly with the price of bitcoin, often beating out bitcoin in bull runs while losing more than bitcoin during corrections.
Below is a chart of MSTR since its CEO first started buying bitcoin. Note the sharp gains but also steep corrections.
Investors must respect the fact that most crypto-currencies and crypto-related stocks are risk assets of debatable if not entirely specious intrinsic value much as most of the dot-coms back in 1999 went broke. The torrential gains over the last year (10-50x) as well as just the last few months (3-10x) in the leading cryptos has been observed in areas covered in the Crypto Reports/Crypto Picks including the metaverse, gaming, NFTs, layer 1s, and DeFi, all of which are intertwined. That said, as has been stated a number of times, volatility well beyond that of what is seen in most all stocks is standard in these cryptos and why most crypto investors lose money over entire bull-bear cycles. 2018 left many broke much as 2000-2002 did to those who made millions in the dot-com bubble. Rockets can achieve interplanetary missions successfully but can also explode. #Challenger
When the markets go to risk-off mode, they are subject to the same selling pressure that everything else is. There are no magic bullets or sure things in the stock market, and those who wish to believe otherwise will suffer the consequences. The essence of a "HODLer" mentality is that risk no longer exists if one simply sits long enough, which flies in the face of prudent risk-management if not simple investment common sense. Obey your selling guides!
Bottom line: the market is in a correction as high-PE and high PE-expansion names get pummeled. QE has pushed valuations well beyond what has been observed in any historical cycle. But the selling has not been limited to high-valuation names as many industrials, energy, and retail leaders have been decimated over the past few days and weeks. Anyone paying attention to the charts of individual stocks could have seen this train coming a while ago, and the train has now burst into flames. Price/volume rules all.
Still, M2 does not contract at this stage of debt and interest rates which have resulted in and will continue to result in further multi-trillion dollar spending packages via QE if history is any guide. Another crisis is due to come from the crippling lockdowns spurred by C19. Money printers go brrrrrrrrrr(r ^ ∞). This is ultimately good for stocks, hard assets, real estate, and bitcoin/crypto. Nevertheless, inflation, a strong dollar, C19 scares, and tapering all can induce a materially deeper stock market correction as we've seen many times since 2010 which can also yank down crypto which is far more volatile. That is what we are potentially seeing play out now. So a deeper correction would come as no surprise until Powell cries "Uncle!" once again.