Summing Up The Week

The S&P 500 made an all-time record high this week, but the price action seems to indicate a bull rally that might be running out of steam in light of economic weakness and uncertainty in the coming months.

The Fed minutes disconcerted investors and the Democratic National Convention provided a lot of commentary for the week, with the markets making relatively modest gains.

Let’s look at the news that moved the markets this week…

Market News

S&P 500 Hits Record High – Sells Off

The S&P 500 index briefly hit an all-time intraday record high on Tuesday followed by a second record high on Wednesday before reversing course to sell off, reported CNBC. While this price action may seem counter-intuitive to newer investors, it makes sense when you look at the market over the long term.

Despite momentum appearing bullish, there are many investors who were “trapped” at these record levels back when the market started to sell off from its then-record highs earlier this year. Many of these investors wish they liquidated more of their portfolio at these points and look at the S&P once again hitting record highs as the second chance to do take profits or, at least, take some cash off the table..

In addition to long-term investors, there were a myriad of specualtors and swing traders who have been riding the market’s return from its March lows to the previous all-time high. They see the record high as good enough of a sign as any to lock in some profits as the market digests its next move.

Fed Officials Expect COVID-19 to “Weigh Heavily”

The Federal Reserve Bank’s July 28-29 meeting minutes released Wednesday showed the Fed expressed concern about the coronavirus continuing to “weigh heavily” on the economy into the future, reported CNBC.

With many states having to retreat from their re-openings and universities returning to remote classes within a week of restarting, this news should have come as a surprise to absolutely no one, however, the market’s overly optimistic view weakened as the market topped immediately when the news crossed the wire.

In addition to a sour outlook on the economy, commitee members also expressed skepticism over using bond purchases to control the government bond yield which could send stocks and bond yields lower and the dollar higher.

A higher dollar would increase consumer buying power, but if the economy is in the toilet with many Americans out of work, a stronger dollar would mean nothing for those without money to spend.

U.S. Weekly Jobless Claims Back Above One Million

The Labor Department released its weekly job report on Thursday, revealing that 1.106 million new jobless claims were filed within the last week versus estimates of 923,000, reported CNBC.

While the one-million benchmark is a relatively arbitrary figure, the more disconcerting news here is the reversal in trend. With jobless claims on the rise, the figure represents weakness in the economy as companies continue to layoff workers to deal with the economic ravages of Covid-19.

The jobless claims report combined with Wednesday’s release of the Fed’s July meeting minutes resulted in more weakening in the markets.

Biden / Harris Officially Accept Democratic Nomination

Joe Biden and Kamala Harris officially accepted the Democratic National Committee’s nomination for their President/Vice President run this week.

While the four-day virtual convention included a star-studded cast of presenters speaking in support of the Democratic ticket, some pollsters argued Biden didn’t speak to his policies enough, preferring to point out why Donald Trump has been ineffective as president.

“The Democrats are trying to make this a referendum on Donald Trump, not his policies, not the issues, but on Donald Trump himself,” said Republican pollster Frank Luntz on CNBC on Friday. Luntz went on to talk about how the Democratic Convention left him “a little bit surprised that it was relatively light on issues and substance and very strong on unity.”

“Trump, if he speaks to his base, is going to lose the center,” Luntz added. “If he speaks to the people who are really strong towards him, he loses that essential six or seven percent right in the middle, that doesn’t like Donald Trump personally, doesn’t like Joe Bidens policies. So, they have to choose between Trump, who they agree with in terms of issues but disagree with his personality, or Joe Biden, who they like but don’t agree with what he wants to do.”

July Home Sales Spike Record 24.7%

The National Association of Realtors reported sales of existing homes soared 24.7% in July from June with the median price of a home sold in July rising 8.5% annually to $304,100, reported CNBC on Friday.

“I think there is a big societal change concerning housing decision today,” said Lawrence Yun, chief economist for the Realtors. “The upper income bracket has been more stable in terms of jobs and they are taking advantage of record low mortgage rates.”

Sales of newly-built homes also jumped 14% from May to June with homebuilder sentiment rising to the highest score in its 35-year history. A combination of strong buyer demand and shortage of existing homes for sale has led to a housing market surge in the middle of a global pandemic.

While some economists continue to point to the buying activity as an indicator of a growing economy, others argue that the flight from urban areas is indicative of a shift in living conditions and may not show that the economy is strong, rather a change in consumer behavior and sentiment.

Next Week’s Gameplan

The general consensus among pundits continues to point to a coming (some say significant) pullback in the markets.

However, the contrarian argument that investors have too much cash waiting on the sidelines could cause the markets to work their way higher.

As for me, the gameplan remains the same as it has for months – I continue to take profits where I can without adding to any individual positions. I am putting money to work through passive investing strategies and regular retirement contributions, however my active portfolio management remains laser-focused on patience.

This Week in Play

Stay tuned for this week’s episodes of my two portfolios Investments in Play and Speculation in Play coming online later this weekend! 

Crytpo Corner

Bitcoin Price Action

Bitcoin broke through its previous weekly high to set a new 2020 high of $12,486.61 this week before pulling back to settle around the same zone it’s been for the past several weeks. Both the Bulls and Bears are waiting for the next big move from here.

The Bullish Case

Bulls point to the setting of a new yearly high as a strong indicator of further bullish momentum. With news of billions of dollars worth of crypto exiting China, many bulls believe the legitimacy of Bitcoin as an alternative currency to fiat is motivating new money to enter the space.

The Bearish Case

Bears argue that the movement to set the new high wasn’t as bullish as it could be, suggesting that Bitcoin needs to selloff in order to consolidate before its next big move. Some Bears even suggest that selloff could be massive with Bitcoin pulling back to test its $8815.01 monthly low (or even lower still).

Bitcoin Gameplan

Current Allocation: 0.889% (unchanged from last week)
Current Per-Coin Price: $11,161.44 (unchanged from last week)
Current Status: +5.325%

With Bitcoin moving slowly higher, there’s not much to do with my current position but just sit on it and remain patient. My approach to Bitcoin is more akin to investing rather than trading.

If I don’t have a big enough position (like now) and I don’t have enough of a gain (like now), then my strategy is to wait. If Bitcoin heads significantly higher and begins consolidation, I’ll prepare to lock in profits. If Bitcoin heads lower, I’ll add to my position at key levels.

Bitcoin Buying Targets

Using Moving Averages and supporting trend-lines as guides, here’s my plan of buying quantities and prices:

0.454% @ $10,887
0.681% @ $10,277
0.908% @ $9877
1.135% @ $9376
1.362% @ $8927
1.588% @ $8458
1.815% @ $8159
2.042% @ $7863
2.269% @ $7237
2.723% @ $6676

Bitcoin Selling Targets

As I mentioned above, my selling targets involve waiting for Bitcoin’s next move.

Why the differing quantities at each level instead of a flat percentage?
Rather than buying an equal percentage, I change my buying quantity at each stage as a reflection of how likely Bitcoin could bottom and rebound from that stage. Rather than increasing my quantity on the way down, I’m used a fixed amount of money, so I’m basing how much I buy by how likely I think Bitcoin will drop to a certain level. In this case, I don’t think it’s likely Bitcoin will be able to break its $3128 low, so my quantities under that price point are less to account for the chances it will get to them.

No price target is unrealistic in the cryptocurrency space – Bullish or Bearish.
While traditional stock market investors and traders may think the price targets in the cryptocurrency space are outlandish due to the incredible spread (sometimes a drop of near -90% or a gain of up to +1000% or more), Bitcoin has demonstrated that, more than any speculative asset, its price is capable of doing anything.

Here are just a few recent price movements over the past couple of years:

• Bitcoin rose +2,707% from its January 2017 low of $734.64 to make an all-time high of $19,891.99 in December of the same year.
• Then, Bitcoin crashed nearly -85% from its high to a December 2018 low of $3128.89.
• In the first half of 2019, Bitcoin rallied +343% to $13,868.44.
• From June 2019, Bitcoin dropped -54% to a low of $6430.00 in December 2019.
• From December 2019’s low, Bitcoin rallied +64% to $10,522.51 in February 2020.
  
• In March 2020, Bitcoin dropped -63% to a low of $3858.00, mostly in 24 hours.
• From March 2020, Bitcoin rallied +224% to $12,486.61 in August 2020.
• Where will Bitcoin go from here? Truly, anything is possible…

What if Bitcoin’s headed to zero?
The only reason I speculate in the cryptocurrency space is I truly believe Bitcoin isn’t headed to zero.

I am prepared for that possibility, however, by knowing I could potentially lose all of the capital I’ve allocated to this speculative investment. Professional advisers recommend speculating with no more than 5% of an investor’s overall assets. Personally, I’ve allocated less than 2% of my assets to speculating in crypto.

I feel that anyone who doesn’t believe in the long-term viability of cryptocurrency would be better served not speculating in the space.

On a good day, this asset class isn’t suitable for those with weak stomachs. On volatile days, the sector can induce nausea in the most iron-willed speculator.

DISCLAIMER: Anyone considering speculating in the crypto sector should only do so with funds they are prepared to lose completely. All interested individuals should consult a professional financial adviser to see if speculation is right for them. No Get Irked contributor is a financial professional of any kind.