It’s been an exciting couple of weeks in the market to say the least. I’m going to go through some basic charts of the areas I’m looking at:
Crypto is having a crazy week. Bitcoin looks like it’s been in a topping distribution pattern since late February, recently breaking down under its 200 DMA. Etherium looks more like a blowoff top, with a frenzy of buying late April and a frenzy of selling from mid May. The altcoins are similar to Etherium but even more compressed.
I drew in the next significant lines of support ($30k in BTC and $2k in ETH). I am avoiding this space for now because I think of these assets as risk-on (aligning with growth & tech) while we’re rotating to more risk-off with a rotation to value. Crypto has shown extreme volatility in the past, including corrections of 50-90% on the way down, so those levels should not surprise a long term holder in the space.
Fundamentally, it is easy to try to label Crypto as worthless and entirely based on speculation, but this isn’t entirely true. There is heavy speculation in the space, but the only way these are going to zero is if they are actually banned. Crypto doesn’t declare bankruptcy and become worthless like a company, rather it goes into and out of favor like a commodity. As for price action I’d say that the risk is currently to the downside, but with massive 40%+ bear rallies, and that a bottom will form and a new leg up will begin a new leg up at some point. After the Dec 2017 crypto crash, this bottoming pattern took 2 years. Right now I get the feeling we’re in a shorter term consolidation which would hit new manic highs later this year followed by a more massive blowoff top. I may re-enter the space at some point but I haven’t decided yet.
The Nasdaq and the Russell 2000 both seem to be in topping distribution patterns just like Bitcoin. These are both risk-on in different ways, as the Nasdaq is heavy in tech and growth stocks, while the Russell 2000 is heavy in meme stocks (like Gamestop and AMC) and hyped re-opening plays. Insider selling has been high in both areas as well. I’ve heard predictions about Bitcoin leading the Nasdaq, and I have been playing around with short-term puts in QQQ.
There are a few people I follow on twitter who do their own forms of Elliot Wave analysis to predict where we are: @DereckCoatney @PuffDragon11 @MasterPandaWu . I am not going to try elliot wave on my own as it is complex, it requires special software, you have to figure which part of the wave you’re in and so on. These charts are interesting, but I like my simple charts and I’m not even going to pretend having expertise in this. Still, they’re generally predicting the end of a generally choppy wave 4 going to a big wave 5 to the downside.
I tend to think bearish, with the idea that we are in a debt-driven asset bubble, so I like to play with downside hedges that don’t crush my portfolio the way they did last year. So last Friday I bought 1-week QQQ puts, sold them for a gain on a Monday drop, bought more on the Tuesday rally, sold them for significant gains on the Wednesday drop, and then bought 2-week QQQ puts again end-of-day Friday. It’s a small bet, we’ll see how it goes.
I’m still heavy in Gold and Silver miners, seeing breakouts from long consolidation patterns. In my opinion we are not going through a crash yet, we are going into a late-cycle rotation to value and I see gold and silver miners as value plays.
The charts for Uranium and Copper miners above still look very bullish, so I’m still significantly in these spaces. I do believe that the inflation calls are over-hyped and that the numbers will likely will roll over by year end – but I also think we’ll see signs of consolidation in the charts before any significant selloff happens. In addition, I am long-term bullish on copper and uranium. Copper will be used like crazy in “green” government infrastructure plans and in the push toward electric vehicles. Uranium will be used like crazy as the life of US nuclear plants are once again extended while emerging markets are building nuclear plants like crazy to build up reliable power capacity without excessive reliance on coal and oil.
I’ll finish this up with charts on TLT (long dated US treasuries) and the DXY (US Dollar vs Euro and a few other currencies). There is significant debate going on about whether these are about to break lower or whether they are forming short-term bottoming patterns. I tend to think that TLT could be in a bottoming pattern, but I did sell some off for gold and silver miners a couple weeks back as TLT hit resistance around 140 and I plan to increase my position in TLT again if it re-tests the late March lows.
My opinion remains that we are not in any kind of new inflation paradigm. Most people will admit that debt levels in the US and the rest of the world are very high, but opinions diverge from there. Many are under the illusion that government debt is like a household budget that we can collectively “buckle down” and pay off. That isn’t the case … money is created by lending, more money must be paid back than borrowed because of interest, and there isn’t enough money in the system to pay it all back. As time progresses, the difference in the amount of dollars in the system vs dollar-denominated debt grows larger, which is why debt levels structurally increase over time and why these debt levels must increase an an ever-faster rate as the levels of overall debt get higher. Right now this difference is enormous, and it takes incredible levels of new debt creation just to keep the system going, but our major political arguments are reducing the deficit and balancing the budget. Our society is highly demand-constrained and our ability to supply goods and services is enormous with a lot of excess capacity which we are prevented from utilizing in the current paradigm. The only thing that tends to change this paradigm and start a new cycle is the advent of major war, as that is the only concern which can bypass the defecit hawks politically. UBI could be a similar game-changer if it pays people for non-productive work on a similar level to that of a war effort, but we are nowhere near getting there.
In short, the inflation we are seeing is from a combination of Covid-related supply constraints and Covid-related underestimation of demand in the face of massive – but temporary – fiscal stimulus. Once the fiscal stimulus finishes washing through our system, demand of goods and services will begin to fall as supply increases and we will see general CPI numbers fall back down.
When will this affect markets? In my opinion, you will not see deflationary forces affecting markets until margin lending starts to turn.
This chart runs through March, but a google search shows that Margin debt increased by another 3% in April. Until this chart tops, and we see actual margin debt reduction, I see the markets going into a rotation to value rather than any meaningful correction – which should be good for precious metals and many commodity-related stocks.
Here’s my latest portfolio:
- DOWNSIDE BETS (28.4%)
- 21.2% TLT Calls
- 4.5% IWM Puts
- 1.9% EEM Puts
- 0.8% QQQ Puts
- GOLD (16.2%)
- 3.1% WPM & GOLD Calls (Large gold miners)
- 2.8% EQX (Small gold miner)
- 0.2% EQX calls
- 10.2% SAND Calls (Small gold streamer)
- SILVER (22.5%)
- 10.7% AG (Small silver miner)
- 1.7% AG Calls
- 5.2% SILV (Small silver miner/explorer)
- 1.3% MTA (Small silver miner/explorer)
- 1.7% RSNVF (Really small silver miner/explorer)
- 1.8% SILVRF (Really small silver miner/explorer)
- COMMODITIES (18.5%)
- 10.0% CCJ shares (w/ covered calls)
- 1.0% UUUU (w/ covered calls)
- 0.5% URG
- 2.0% ALB (Lithium)
- 1.9% NMGRF (Graphite)
- 3.1% NOVRF (Nickel/Copper)
- CANNABIS (5.5%)
- 5.5% split between CRLBF, GTBIF & TSSRF (companies with significant US footprints)
- CASH (8.9%)
I have built up considerable cash recently by selling EQX and replacing the exposure with EQX calls. As we tested major support with gold, I saw the 1-month calls selling really cheap and figured that I could maintain my position with lower risk to see which direction things head. If we go into a significant downward correction that some of the Elliot-wave guys are predicting at the end of May, this will be my dry powder to reallocate.