Summing Up The Week
This shortened holiday week started out rocky with a “family office” multibillion dollar hedge fund getting in over its head, getting liquidated, and knocking the stuffing out of more than a few prime banks.
Follow this with a new high in the 10-year treasury, and it looked like the market was in for trouble… and then it wasn’t.
While there was no specific good news, the market rallied into the end of March and then kicked off April with a bang as analysts believe the economy will soar in the second quarter.
Let’s take a look at the news that moved the markets (or didn’t) this week…
Market falls on margin calls on bank holdings
Stocks started the weak in a downdraft due to margin calls from Friday on banks invested in companies that came under severe selling pressure, reported CNBC.
What’s a “margin call?”
Hedge funds, banks, and even retail investors can borrow money to buy more stock than their account’s capital will allow. These loans are called “margin” and buying a stock with margin is often referred to as buying “on-margin.”
However, if a position bought with margin starts to drop in price dramatically, the lender who provided the margin can require the borrower to put up additional funds to support the loan. If the borrower cannot, then the lender can automatically sell positions in the borrowers account until the margin has been repaid – this action is what’s referred to as a “margin call.”
On Friday, several high-flying companies such as Discovery (DSCA) and ViacomCBS (VIAC) pulled back dramatically with those two each dropping more than -27%.
Archegos Capital Management, a multibillion hedge fund family office, had obtained an extremely high amount of margin from six of Wall Street’s biggest brokers. None of the six were aware of the others’ positions. On Friday, ViacomCBS sold several hundred million dollars worth of stock and bond offerings to capitalize on its inflated stock price which many suggest was the “starting gun” for margin calls which would eventually liquidate Archegos.
Many investment banks including Credit Suisse suffered as it had lent substantial margin to Archegos with the bank seeing its share price flop -13% as it warned it would face a “significant” hit to first-quarter results due to it having to exit hedge fund positions.
Despite a systemic selloff on Monday, analysts believe the situation is unlikely to have long-lasting impacts. “While other funds may be caught in the mess, we fail to see how this specific car crash of a trade ends up propagating across the financial system via counterparty default,” said Bespoke Investment Group in a note. The firm did warn investors that they should “get used to the GMEs [Gamestop] and Archegos of the world because they seem to be happening with more frequency even if their fall-out is contained.”
10-Year Treasury Yield continues to scare markets
On Tuesday, the 10-year Treasury yield hit a 14-month high as stimulus spending continues to stoke expectations of rising inflation, reported CNBC.
The yield on the benchmark 10-year note hit 1.749% right before the stock market rising to 1.776% earlier in the session, the first time it traded around that level since January 2020.
The markets showed quite a bit of volatility as the market awaited President Joe Biden’s reveal of the details of his infrastructure plan on Wednesday.
President Biden unveils $2T infrastructure plan
On Wednesday, President Joe Biden unveiled his infrastructure and economy recovery package totaling more than $2 trillion, reported CNBC.
The plan includes $621 in transportation infrastructure projects such as bridges, roads, ports, etc; $400 billion to care for elderly and disabled Americans; more than $300 billion in water infrastructure, expanded broadband access, and improvements to electric grids; more than $300 billion into building affordable housing along with constructing and upgrading schools; and $580 billion in investment in Amerian manufacturing, research and development, and job training.
Additionally, the plan intends to raise the corporate tax rate from 21% to 28% in an effort to help fund some of the spending as well as a minimum global tax for multinational corporations to ensure they pay at least 21% in any country.
Analysts predict economy to boom in Q2
Historically, the second quarter is positive for the stock market, and this year appears to be following that trend as analysts predict the economy will boom in the second quarter thanks to the national reopening, reported CNBC.
“If there’s a risk, it’s to the upside rather than the downside,” said Sam Stovall, chief investment strategist at CFRA in an interview with CNBC. “From an economic perspective, we could be underestimating and that could end up providing a bit of a boost to the stock market unless interest rates rise even further.”
Since 1990, the S&P 500 has averaged a 2.8% gain in the second quarter, even with the S&P 500 closing out Q1 with a gain of 5.8%.
“The consumer is the big story; it’s not just the stimulus bills… it’s the leftover stimulus money that’s accumulated in bank accounts,” said Ethan Harris, head of global economic research at Bank of America. “We think there’s $3.5 trillion in bank accounts above and beyond the normal level.”
Next Week’s Gameplan
The market’s volatility, particularly focused in specific sectors, has started to provide buying opportunities across my portfolios. That being said, I continue to remain cautious and conservative with my quantities.
With the market flirting with all time highs in the S&P 500 and Dow Jones nearly every day, the possibility that we will see even just a garden-variety correction pullback of 5-10% (which normally occur in healthy bull markets) remains high.
Get Irked contributors are not professional advisers. Discussions of positions should not be taken as recommendations to buy or sell. All investments carry risk and all readers must accept their own risks. Get Irked recommends anyone interested in investing or trading any asset class consult with a professional investment adviser to determine if an investment idea is suitable to them and their investment goals.
Click chart for enlarged version
Bitcoin Price (in USD)
Bitcoin Price Action
Where to From Here?
Bitcoin had a mild week, trending upward from last Friday with a series of higher-highs and higher-lows as it works its way toward its all-time high.
The Bullish Case
Bulls see Bitcoin’s resilience as a sign that the era of huge 85% pullbacks are behind us, with some crypto firms like eToro producing advertisements suggesting just that fact, encouraging speculators to enter the market since stability has arrived.
The Bearish Case
Not that the analysts ever seem to get Bitcoin’s next move right, CNBC having a bearish Bitcoin analyst on a show is always cause for concern (CNBC is typically bullish on Bitcoin with some theorizing the reason as one of their biggest advertisers is pushing crypto).
“I think we’re very, very close to perhaps an intermediate-top here,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management, on Tuesday’s episode of Trading Nation. “A little bit of a correction is certainly due at this point.”
Schlossberg pointed to the $52,000 mark as a key support line suggesting, “if [Bitcoin] breaks below that level, it’s going to be a big warning flag.” Scholssberg went on to warn that if Bitcoin hits a lower-low after a year of higher-highs, and higher-lows, a break of that support could indicate a big selloff.
Current Allocation: 2.554% (-0.273% since last week)
Current Per-Coin Price: $57,089.96 (-1.122% since last week)
Current Profit/Loss Status: +2.501% (+10.133% since last week)
Watch out for “Fat Finger” mistakes!
What’s a “Fat Finger” mistake?
A Fat Finger refers to a mistake made by a trader where an order is entered in erroneously and creates an issue with a trade. In my case, I was trying to enter in a limit-sell order near Bitcoin’s All-Time-High on Saturday, didn’t pay close enough attention to my trading panel, and made a limit BUY order, instead.
What happens when you make a limit buy order at a much higher price than the current price of an asset?
Fortunately, making a limit buy order at a higher price typically doesn’t fill at that higher price. Instead, the broker converts your limit order to a market order and it fills at the next available price. In my case, I ended up adding to my position at $55,795.49.
While not a terrible fat finger mistake since the fill was still below my per-coin price of $57,792.41, that was not the optimal buying point. At any rate, it did lower my per-coin cost -0.981% from $57,792.41 to $57,225.71 so rather than sell the extra immediately, I incorporated it into my trade, raising my allocation 0.283% to 3.110% from 2.827%.
On Monday, I had the opportunity to reduce my allocation when Bitcoin rose over my per-coin cost. I decided to use stop-loss limit orders in case Bitcoin pulled back to close to my cost which it did Monday afternoon, triggering a sell order I had in place which filled at $57,521.73.
The order reduced my per-coin cost -0.237% to $57,089.96, but, more importantly, reduced my allocation -0.556% down to 2.554%, an amount I’m much more comfortable with given Bitcoin’s relatively close to its all-time high.
Bitcoin Buying Targets
Using Moving Averages and supporting trend-lines as guides, here is my plan for my next ten (10) buying quantities and prices:
0.456% @ $50,966
0.456% @ $47,130
0.456% @ $43,453
0.456% @ $38,208
0.456% @ $33,438
0.456% @ $29,101
0.456% @ $26,184
1.702% @ $21,236
2.526% @ $16,750
2.858% @ $13,716
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 some of Bitcoin’s price movements over the past couple of years:
- In 2017, Bitcoin rose +2,707% from its January low of $734.64 to make an all-time high of $19,891.99 in December.
- 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 crashed -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 crashed nearly -63% to a low of $3858.00, mostly in 24 hours.
- Then, Bitcoin rallied +988% to a new all-time high of $41,986.37 in January 2021.
- Later in January, Bitcoin dropped -32% to a low of $28,732.00.
- In February 2021, Bitcoin rallied +103% to a new all-time high of $58,367.00.
- Later in February, Bitcoin dropped -26% to a low of $43,016.00.
- In March 2021, Bitcoin rallied +44% to a new all-time high of $61,788.45
- Later in March, Bitcoin dropped -19% to a low of $50,305.00.
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 that to speculating in crypto.
I feel that anyone who doesn’t fully 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. If a speculator isn’t confident in the space, the moves will cause mistakes to be made.
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.
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If you or someone you know are having thoughts of suicide or self-harm, please contact the National Suicide Prevention Lifeline by visiting www.suicidepreventionlifeline.org or calling 1-800-273-TALK.
The hotline is open 24 hours a day, 7 days a week.