Dec 30 2020 Market Commentary, Stocks, BTC/ETH, Metals
People are excited about markets. Sunday morning, I looked at my phone around 830 am and saw that I’d received texts from two different people. I text about markets every day… but before 830 on a Sunday only happens when there is genuine excitement.
Going back 3 years, to late December 2017, the S&P was trading ~2900. As I write at 3740, up ~29% in the last 3 years. The incredible fall and rise in 2020 aside, markets seem to be moving up high single digits on an annual basis. Have you seen the sell-side list of price targets for the S&P in 2021? They’re all higher! Average target price? 4042. That imputes a consensus expectation of 8.5%, right in line with recent history. These expectations all seem quite muted given more recent history, but we’ll see.
I was taught to pay attention to the breadth of rallies. One of the concerns about the post March rally was the amount of money that flowed into FAANG, TSLA, a select few names. As summer turned to fall, the recovery trade was in full bull mode. Now the rally is broad. That’s a welcomed sign for those sitting in index funds. Since the big names represent such a large portion of the S&P weightings, you find yourself in a situation where a few volatile stocks can dictate the short term fate of the whole index. As the rally broadens, that risk lessens.
There are lots of narratives out there about BTC. If you are considering investing/trading in BTC, I’d recommend that you only follow two of those narratives.
1) Reputable people/organizations are buying
2) Regulation and the impedements for interested parties who have yet to dip their toe progresses
I would avoid listening to any of the talk about “hedge for inflation”, “hedge against central banks losing control” or whatever other reasons many of the die-hards may state in their buying. It is not to say they are necessarily wrong in their thinking. They may be right in time. But BTC hasn’t been widely traded for very long, and the evidence certainly does not support that it’s a safe haven. It does not necessarily “diversify” your portfolio either.
I remember vividly last March when BTC made its lows around 4-5k. I had written a post on linkedin not long before called “why I’m not selling at 13500”. Standing in my kitchen, receiving texts from an old trading friend reminding me that “BTC is going to 0, where is your stop?”, I remember feeling physically sick. I still believed in the story, so I never sold, and bought some at higher levels after things seemed to stabilize. But that experience has led me to operate with the belief that “Bitcoin is a hedge for nothing”. If I’m considering future buys/sales, it will not be to “hedge a portfolio”. If you are thinking in this way, unless you are talking small single digits, I suggest you reconsider. Please recall that at those lows, BTC was the worst performing asset on the board. Lot’s of volatility, not a safe haven if stocks are to sell off.
But there are a few things BTC (and eth) has going for it.
1) Big names buying- A few years ago, the debate was “will this thing last”. When Paypal, Square, and insurance companies are buying and making it accessible through their platforms, it’s not going anywhere.
2) Legendary managers/traders touting it’s virtues. PTJ and Minerd to name a couple. If you step in, at least you are amidst the company of some of the best. The “this is a scam” logic that was prevalent a few years back is dwindling
3) Regulation- This may frustrate some of the early adopters. The more regulation imposed, the less “decentralized” it may seem. But if the concern is price, then regulation has the potential to be a good thing, because it creates a path to allow new buyers to enter a market. Looking at the news, my take is that everything except for BTC and ETH is at risk. They are the darlings, and have/will have their own CME futures contracts. You see what’s going with XRP…. Once liquidity providers start pulling because of regulatory crackdown, the damage is done regardless of whether they are indeed compliant. As for Stablecoins, the treasury dept recently stated they should be used in a way that “effectively manages risk and maintains the stability of the U.S. domestic and international financial and monetary systems”. No one said anything like that about BTC or Eth. Takeaway? Regulation will likely make alternatives to ETH/BTC less attractive, while simultaneously making it easier for a wider class of investors to invest in BTC/ETH.
BTC Options: You can check out the price of options on Deribit. Unfortunately, at this point it’s a lot harder than you might think to get into the options game. Very few of the retail brokers are allowing for trading of BTC at all, let alone the options. The margins are currently prohibitive, and I have heard that a number of FCMs currently lack interest in supporting traders looking to get into the market. That I think above all is why you see fairly light CME volumes. I assume that will change in time, but we’re not there yet.
Nonetheless, we can see where the options trade on Deribit. No surprise given the recent volatility, the options are juiced. As I write with BTC trading 26,500, the 36,000 calls expiring in 60 days are 1500+ bid. When option trading becomes more universally available, it’s going to be a big deal. There will almost certainly be interest as the amount of premium is to great to pass up for those longer term holders. Sure, they’re priced where they are for a reason, but consider that you can collect (1500/26500). That’s 30+% on an annual basis. That feels like a lot given that those writing covered calls wouldn’t be called away unless it moves ~10k in 60 days. With active options markets, the potential for interest and participation in the crypto markets will grow. I find it frustrating that I can’t trade these options, as selling calls against part of the position would allow me to better justify the size of the holding from a risk management stand point. We’ll get there, but it’s early days.
Gold/Silver- One of the big narratives around particularly gold has been tied to BTC, and the idea that BTC replaces the need for gold. They both have limited supply and can act as stores of value, but BTC can be used for payments and is much cooler. There was likely a real impact from this narrative, as there have been outflows from GLD, the best proxy for retail interest in Gold. While I’m tempted to say who cares, it can’t be overlooked as Western retail demand tends to be the primary driver of the gold price. That all being said, I have found that gold is typically better to buy when no one is interested. When people start getting excited about gold, I get cautious. One only has to look at the history of how the hedge fund community fairs vs the dealer community to know that speculatively finding good entry and exit points has not been the forte of retail or the “sophisticated” buy side.
Above is a weekly chart of gold back to early August when it made its all time high just shy of 2100. There was a clear downtrend that ensued thereafter. Right now it appears the downtrend has stopped, at least temporarily. I like to pay attention to setups where an up or downtrend appears to stop and consolidate. Out of a consolidation pattern, moves (when they do happen) tend to be greater in either direction. Think of consolidation as a sign that both buyers and sellers are generally in agreement about price. When one side gains an advantage, the other side is wise to back off and wait for better prices. If gold manages to trade above 1900 for a day or two, that should give us some confidence that the medium term downtrend is over and that our near term downside risk is limited.
Like gold, silver peaked in early August. It dropped faster and has been in a consolidation pattern, as opposed to gold’s more clearly defined downtrend. If it can clear the 28.5 level, there is serious room to run to the upside. The following chart shows Silver (green and red bars) overlayed with gold (purple) since they both made all time highs in 2011. It is not news that silver has massively underperformed in the last few years, but if it is to play catch-up, there might be a big trade here.
Notice the red line going across the chart above. This was the ~1525 level in gold that had served as support for close to 2 years after it broke down from its 2011 high. Once that level broke, gold began a multi year downtrend. Look at what happened in 2019 when gold (purple line) got back above this level. 6 years of resistance had given way and gold took off like a slingshot to make new all-time highs.
Silver still hasn’t broken through the support that gave way in 2013. Above 30, SI will have clearly broken that long term resistance. Gold managed to make a new all time high ~6 months after the break. An all time high for silver would imply a ~66% move.
None of this is investment advice. If you are looking for trades with asymmetric risk reward setups however, SI seems like it is worth the attention.
Happy New Year to Everyone, and best of luck in 2021.