Last week, I wrote a post on seasonality, showing the following chart for Bitcoin:
As you can see, for the last 5 years Bitcoin has always gone down in September. Then it would rally strong in October. The exception was 2018 where it fell 3.5% – in an environment where the S&P 500 fell 6% and the Federal Reserve, which was on a program of balance sheet reduction and small interest rate hikes, reversed course back to easing the following January.
In other words, Crypto is exceptionally strong in October so it was on my mind. In addition, Crypto has previously moved on a 4-year cycle based on the 4-year halving cycle of Bitcoin (Bitcoin’s production rate for “miners” drops in half). Both 2013 and 2017 have had enormous end-of-year runs (followed by blow-off tops), and there have been a lot of comparisons with different Crypto assets to these prior moves in Bitcoin. The 50% mid-year pullback has also been a common theme. I’d been expecting this year to be similar, but debating on whether the current high levels of attention mean that acceleration to blow-off top happened early. Then last Sunday I saw an interesting catalyst in the “Pandora Papers.”
In case any of you haven’t heard about it, it’s worth YouTubing “Pandora Papers.” Basically, hundreds of journalists got together and did an in-depth study to expose the financial dealings of the world’s wealthiest individuals, and how and where they moved their money in shell companies. The actions of the super-wealthy can definitely move markets so it’s best to give it some thought. There are many countries, China being a big one, that have extraordinarily wealthy insiders who are vulnerable to political purges.
Picture an enormously wealthy politician in Hong Kong for example, seeing anyone associated with the 2019-2020 protests arrested, then seeing Jack Ma brought down and a big crackdown on rich people who were siphoning money out of the country. Now there’s a big release in the Pandora Papers showing shell companies he controls and assets in an array of foreign countries. Even the fear of what they might uncover could be enough to convince that person to flee, and he’ll want to bring as much money as he can with him. How do you do it? Banks are all run by intermediaries, and they would certainly not allow these transfers if they fear government reprisal – but Cryptocurrencies move money outside of that system. A wealthy person with a server could buy a cryptocurrency and move it to a numbered digital wallet to reclaim anywhere – which is why China has been moving to prevent any of their banks from supporting any transfers of money into cryptocurrencies.
Even if China was successful in preventing this, what about super-wealthy looking to flee Russia, Pakistan, the middle east, Iran, etc – any of these people trying to move money through crypto is an enormous catalyst to push the price further. Add in wall street momentum traders, a stock market which has roared higher every single November for the last 5 years, and the end of the 4-year rally and I think we really have something here.
Needless to say, once I connected those dots, I wanted to put more money into Crypto – especially the biggest two, Bitcoin and Etherium, because money moving through a token like this would want the liquidity of the biggest ones. I immediately transferred more money into Etherium in my Coinbase account, but most of my money is in my trading account, which doesn’t do crypto. So I looked up bitcoin proxies and there are several – MSTR, GBTC, MARA, etc. I wanted to leverage a small amount with call options, so I went with MARA (MSTR’s share price is high so options are too expensive, and GBTC doesn’t have options trading).
Here’s where my portfolio ended up:
- HEDGES (16.2%)
- 14.9% TLT Calls
- 1.3% EEM Puts
- PRECIOUS METALS (49.5%)
- 8.9% AG (Silver), mainly shares & some calls
- 5.9% SAND (Gold, Silver & others), all calls
- 5.9% EQX (Gold), mainly calls & some shares
- 5.2% LGDTF (Gold)
- 4.0% SILV (Silver)
- 4.1% SILVRF (Silver)
- 4.0% MTA (Gold & Silver)
- 3.4% MGMLF (Gold)
- 2.1% RSNVF (Silver)
- 2.3% SSVFF (Silver)
- 2.0% HAMRF (Gold)
- 0.9% WPM (Gold, Copper & Silver), all calls
- 0.8% GOLD (Gold, Copper), all calls
- URANIUM (16.9%)
- 9.1% CCJ, covered calls sold on most of it
- 6.7% UUUU, covered calls sold on most of it
- 1.1% BQSSF
- COPPER & NICKEL (5.4%)
- 5.4% NOVRF
- CANNABIS (9.3%)
- 1.5% CRLBF
- 1.6% GTBIF
- 1.7% TRSSF
- 1.4% CCHWF
- 1.5% AYRWF
- 1.6% TCNNF
- CRYPTO (4.5%)
- 2.9% ETH
- 1.6% MARA calls
- DERECKS TRADES (1.5%)
- CASH (-3.4%)
It was a pretty light trading week for me, aside from the MARA calls Monday morning. I didn’t sell any of my TLT calls – they got crushed a bit as long bond yields soared higher – but my account gained 1.2% on the week as the smaller miners rallied so it’s still a hedge.
The negative cash balance is a small amount of margin. I don’t like to dip into margin too much because I don’t want to be subjected to forced sales, but it is useful when you want to put on a trade and you don’t want to sell anything. Next week my covered calls expire in CCJ and UUUU, and I’ll see if my Uranium is reduced to a much smaller allocation that I’d be adding to off dips or if they expire worthless in which case I’d hold what I have. Either way, I probably won’t trade much until that resolves.
I do plan to add to my TLT calls at some point here because I am still completely convinced that bond yields will revisit the lows, but with the extreme seasonal weakness in both September & October followed by a stronger November, I think I’ll refrain from adding anything there until the end of the month.
Last note, I should mention that I’ve been hearing a lot of bearish calls lately.
Make no mistake, this chart of the S&P 500 certainly does look bearish with a clear head-and-shoulders pattern followed by a failed test of the 50-day moving average.
Risks are elevated, and I am certainly wary – that’s why my overall bullish exposure to the general stock market is crammed into the 1.5% I call “Dereck’s Trades,” which is call options in companies that have very bullish patterns based on Dereck Coatney’s Elliot Wave projections, currently divided between 9 different names. I also expect the mining stocks and cannabis stocks I hold to fare better in a market correction because they have already been pulling back for a while (aside from Uranium) and they don’t have much (if any) institutional or mutual fund exposure – so if those guys sell that won’t be what they’re selling. Finally, a real market crash would end up with a rush to govenment bonds and my hedges would gain.
That being said, I don’t think we’ve hit the top yet. Too many people seem worried – the debt ceiling fight, will the fed taper, the high CPI readings, the ongoing Covid-19 restrictions, etc. Why would that prevent this from being the top? Market mechanics. Many put options have been purchased as hedges, and many shares have been sold.
A common dip like we’ve seen many times in the last 2 years works like this … active investors start to sell, worried about chart formations or Evergrande contagion, or fed tightening, or whatever. As the market goes down, two forces spring into action buying up shares – the dip buyers, and the closing of short positions and puts by active investors. Much of the money just sits on the sidelines and doesn’t trade. Once the active investors are done selling or have no more to sell, the market stabilizes and starts to shoot higher as the next waves of price-insensitive buying continue on – both from corporate buybacks and from 401k flows into passive index funds. Active investors start to get left behind and have to get long again leading to the next peak.
A larger correction, like we saw in March 2020 or Oct & Dec 2018, involves a big enough rush to sell to lead to forced selling from stop losses, margin calls, and so on. The downturn in 2008 even included what they called “mutual fund puking,” where people shifted 401k money away from stocks and the underlying funds had to sell shares. You could argue we’re seeing that with ARKK, but that’s not where the vast majority of US workers are parking their 401k money.
Anyway, here’s why I’m leaning bullish:
- Seasonal factors: September and October are generally tighter months as far as liquidity is concerned, which I believe is due to banks starting to unwind and reduce derivatives trading to meet their Basel-3 regulatory targets by end of year. November is more bullish as much of this unwinding is complete and holiday sales & sentiment pick up. We saw a similar struggle in the S&P 500 last year.
- Bearish positioning: I admit that I don’t have any fancy programs to help me find positioning or sentiment, but from what I see from the finance crowd I follow on Twitter, there is significant bearish positioning right now – which means those who are worried have less to sell and there are a substantial number of index put positions which will either be sold off or expire worthless on the Oct 15th options expiry.
- Federal Reserve response: From Covid worries to employment report disappointments, to fiscal stimulus pullbacks and debt ceiling fights to allow the federal reserve to hold off on anything the market would consider tightening. This at a time where the 2022 mid-term elections are nearing and Fed Chair Powell is in a precarious position as a bargaining chip amongst fighting factions in the Democratic party.
With those 3 points, I really think the market’s got another leg higher. I expect the top to come when Covid restrictions are all but gone, and both the US government and the Federal Reserve agree that the US economy no longer needs emergency support. Once that happens, you’d better be ready for a drop!