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.
Crypto
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.
-Ben
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