Summing Up The Week

The volatility we’ve seen for the majority of 2022 showed absolutely no sign of calming down with every market experiencing extreme movements this week including stocks, gold, and crypto. Even bonds whipsawed from lows to highs and back again – extremely unusual behavior for such a typically stable market.

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

Market News

What caused Monday’s massive selloff?

Some of my readers wondered why we had such a big selloff to start the week even though there was no news catalyst to create that reaction.

The stock market is a funny thing: often when there is a crescendo of selling into a Friday close, those who didn’t sell into it ruminate over the weekend and start to panic. They start thinking, “Oh, god. I should have sold. Why didn’t I sell? Is the end of the world coming??? I SHOULD HAVE SOLD!!!”

So, when the market reopens on Monday, all of these market participants who have been worrying themselves into a tizzy over the weekend jump on the selling bandwagon. Then, everyone else – including those who may have sold the week prior – see this new round of selling and that causes them to think “someone must know something!!!” so they sell even if they already sold the week prior.

This kind of emotional reaction to a market movement is nothing new; it’s just the way human psychology works. But, it’s this very reaction that made me create my rule: Only  SELL on GREEN days and only BUY on RED days.

Believe it or not, that’s my most important rule. No matter whether you’re an active investor/trader or just a Dollar-Cost Averager (DCA), that rule can save you a lot of money… in both bear and bull markets. 

At the very least, forcing myself to wait instead of jumping on an emotional move gives me time to think about my move so when I do get the opportunity, I’ve really thought about whether or not I actually wanted to buy or sell or if it was just my emotions making me think that way.

Producer Prices increased 10.8% in May, a near record pace

On Tuesday, the Bureau of Labor Statistics revealed that wholesale prices, also called the Producer Price Index (PPI), rose 10.8% in May, in line with Dow Jones estimates and doubling the pace of April, reported CNBC.

The PPI measures the cost of supplies for companies to produce products and while such a high gauge would normally cause a selloff in the markets, the stock market sold off so spectacularly on Monday (a continuation of last week’s selloff as a result of the record-high CPI released on Friday), the markets were relatively calm following the release.

The Fed hikes rates by highest bump in more than 25 years

On Wednesday, the Federal Reserve Bank raised the benchmark rate by 0.75%, the biggest single rate hike since 1994 and far in excess of the 0.50% originally promised by the Fed just over a month ago, reported CNBC.

Hiking by more than the 0.50% after Chairman Jerome Powell claimed that a 0.75% hike wasn’t being considered at the last Fed press conference demonstrates exactly how concerned the Fed is about recent inflation reports.

Additionally, the “dot plots,” (a gauge filled out by Fed committee members indicating where they intend to raise interest rates) show that the Fed plans to finish 2022 with an benchmark rate at 3.4%, an upward revision of 1.5% over March’s estimate.

“Overall economic activity appears to have picked up after edging down in the first quarter,” said a statement released by the Fed. “Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.”

During his press conference, Powell announced that an additional 0.75% hike is very much on the table for the Fed’s July meeting as well. The market continues to remain firmly in “bad news is good news” territory and took this announcement as a sign that the Fed may have the fight against inflation under control, with the S&P popping more than +2% following the announcement before calming down.

The Market Flip-Flop Continues…

Just like what happened the last time the Fed met, on Thursday, the market gave back all of the gains that it saw after the Fed announcement Wednesday… and then some, reported CNBC.

This incredible and highly irregular volatility in the markets just goes to show how there is no distinct trend for investors or traders; everyone’s confused about what all of this data means. “It’s about time we exit this artificial world of predictable massive liquidity injections where everybody gets used to zero interest rates, where we do silly things whether it’s investing in parts of the market we shouldn’t be investing in or investing in the economy in ways that don’t make sense,” Allianz chief investment advisor Mohamed El-Erian told CNBC’s “Squawk Box” on Thursday. “We are exiting that regime and it’s going to be bumpy.”

This kind of volatility just reinforces my discipline – don’t try to predict which way the market, stocks, or crypto are going to go, just have a plan for both directions: what are you going to do if your investment goes higher and what are you going to do if your investment heads lower?

Next Week’s Gameplan

With all of the macroeconomic and global factors remaining in play combining with seasonally low trading volume due to summer vacations, there is no reason to believe we’re out of the woods when it comes to extreme moves in the markets.

As always, develop your plan in advance and be patient. If you’re uncomfortable, either reduce the quantity you typically buy until you can handle the volatility, or just sit pat and make no moves until you feel more comfortable. Remember: if you don’t know what to do, do nothing at all. Doing nothing is always a perfectly reasonable plan.

Have a great week, everybody, and I’ll see you here next Friday!

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 CRASHED into a Crypto Winter!!!

It finally happened – Bitcoin has finally crashed down to the near-$20K level as we’ve all been expecting since it first pulled back from $64K more than a year ago. 

It started on Sunday when Bitcoin lost all support, dropping through the key $25,338.53 support established only a few weeks ago in May, and the crypto failed to find any new support until it crashed down to $20,071.00, where, intriguingly, the crypto found support at my Next Support of Last Resort (?) trendline which hasn’t needed to provide support for Bitcoin since more than two years ago on April 16, 2020. Will it hold?

The new weekly high was set at $23,299.22 following a bounce on Bitcoin’s way down. At this point, there is no real bull case. We’re officially in a “Crypto Winter” (a term coined to describe a period of extreme bearishness in the crypto markets). Believe it or not, this kind of move in Bitcoin is normal. In fact, Bitcoin’s last crash into a Crypto Winter happened back in 2018 and Bitcoin didn’t find a bottom until it sold off -84.27% from its high to its bottom.

Should the crypto make a similar selloff this time around to what it did in 2018, we shouldn’t expect the crypto to bottom until the $10K-$15K mark (if not lower as prior Crypto Winters saw Bitcoin sell off in excess of –90%… in other words, find something to hold on to for a while).

The Bullish Case

Bulls spent the week scrambling to the nearest interview appointment to tell anyone who’d listen that Bitcoin’s current level presents “an excellent buying opportunity” and desperately trying to explain away the downside move as an anomaly caused by liquidity issues or by failing altcoins. The Bulls are, quite simply, wrong. From here, the most likely forecast is further downside and pain based on Bitcoin’s own historical trends combined with the negative macroeconomic global outlook.

The Bearish Case

The Bears continue to control the narrative. All those who predicted a selloff to $20K were vindicated and validated this week during Bitcoin’s epic swoon. At this point, I will continue to favor the bearish outlook until Bitcoin sells off to $14K (or even lower) thanks Bitcoin’s past performance during past Crypto Winters.

Bitcoin Trade Update

Current Allocation: 15.313% (+11.216% since last update)
Current Per-Coin Price: $24,066.09 (-19.983% since last update)
Current Profit/Loss Status: -14.412% (-12.507% since last update)

The volatility in the crypto space can really flip your head around. Last week, I was taking profits but this week’s all about adding back to the position now that Bitcoin has lost support once more.

I started making buys Saturday night with a tiny quantity at $28,145.10 and made additional buys at increasing quantities throughout the week with my lowest buy at $20,955.30 on Monday. The combined buys gave me a pretty outstanding average buying price of $22,479.94. My buys lowered my per-coin price -19.983% from $30,076.22 to $24,066.09 and increased my allocation +11.216% to 15.313% from 4.097%.

That’s right, despite Bitcoin’s absolutely epic selloff, my crypto portfolio is still 80.87% cash as I plan for worst-case scenarios much, much lower than what would be considered even in a “typical” Crypto Winter. Given the huge amount of interest from both retail and institutions during the bull market run to $69K, I believe a bigger selloff than -84% for Bitcoin may be in the cards this Crypto Winter as there’s a lot more leverage and liquidity that can still panic-sell out of the space.

Should Bitcoin bounce from here, the amount I sell at higher levels will take on a very different strategy as I will be reducing my allocation with profit-taking in very small quantities from here in preparation for Bitcoin to attempt a higher-high than $69K (however, it should be noted that a new high could be months or even years off, at this point).

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:

0.124% @ $20,093
0.444% @ $19,306
1.778% @ $18,285
2.222% @ $16,836
2.667% @ $14,152
3.556% @ $11,909
4.444% @ $10,605
4.444% @ $9,281
4.444% @ $7,811
17.182% @ $5,085

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.
• In December 2019, Bitcoin crashed -54% to a low of $6430.00 in December 2019.
• In February 2020, Bitcoin rallied +64% to $10,522.51.
• 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 April 2021, Bitcoin rallied +51% to a new all-time high of $64,896.75.
• In June 2021, Bitcoin crashed -56% to a low of $28,800.00.
• In November 2021, Bitcoin rallied +140% to a new all-time high of $69,000.00.
• In June 2022, Bitcoin crashed -71% to a low of $20,071.00.

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.