Summing Up The Week

While I’ve been trading successfully for nearly 20 years, I’ve only been running the Get Irked website for a little more than a year-and-a-half. Unfortunately, this isn’t the first time I’ve written a note like this (see Week in Review – Episode 18).

When the market’s selling off dramatically – particularly when it’s setting historic sell-off records – keeping it together can be challenging. COVID-19 shouldn’t be taken lightly, and the priority for every reader right now should be to take care of yourselves and those you love.

It’s important to remember humanity has tremendous capacity for overcoming the odds. We will figure out a way to contain, treat, and eventually cure/vaccinate against COVID-19. However, for the moment, there will be potentially frightening volatility both in the market and in the world.

Your portfolio isn’t a top priority right now. If you own the stocks of quality long-term companies and index ETFs, they will return to their previous highs and make new ones with time, the economy always does. Remember your time horizon: I’m a long-term investor. My time horizon is 20-30 years.

Stay the course. This, too, shall pass. For now, take care of yourself and your loved ones, and try to relax. (Oh, and stock up on canned goods and pasta…)

Now, back to our regularly scheduled programming…

Market News

Oil Plummets 30% from OPEC deal failure

OPEC met last week and failed to make a deal to cut back on oil production in an effort to reduce plummeting oil prices. After the Russians pitched a fit, picked up their ball, and headed home, the rest of OPEC stuck around to play poker in one of the guys’ hotel rooms in an effort to come up with a deal.

They didn’t.

Saudi Arabia announced it would increase production and slash prices leading to fears of an all-out price war, reported CNBC on Sunday.

But, what’s wrong with cheap gasoline?

It seems counter-intuitive to be upset about cheaper prices at the pump, however, American oil producers are deeply in debt, having taken out massive loans to increase shale production. The same producers were struggling to make ends meet when oil was at higher prices, but the new price war threatens to send them further into unprofitability.

If the producers can’t turn it around by the time the debt is due, they will default on their payments. The debt amount is so significant that failure to pay could potentially send the banks into a financial crisis.

Oh, and all of this comes amid the coronavirus crisis which shows no signs of going anywhere. Heading into the week, the Dow futures indicated an epic sell-off in excess of an additional 1,000 points from last week’s already weakend state.

10-Year Treasury Yield hits All-Time Lows

Going into Monday morning, the yield on the 10-Year Treasury Bond dropped to 0.318%, an all-time low, reported CNBC.

Why is this significant?

Remember those “savings bonds” your grandparents used to buy you when you were a kid? Imagine if the interest you received to keep your money in one was 0.318%. As in, if you bought $1,000 worth of savings bonds and hung on to them over the course of 10 years, you’d receive $3.18 each year* a total of just $31.80* for ten years to keep your money in them! 

* Of course, you’d receive additional compounded interest, but at this rate, who cares?

Why is the interest rate so low?

Whenever there’s fear in the markets, investors move their money from stocks where prices are falling into fixed assets – typically bonds. Just like how a stock that pays a dividend sees the yield drop as the stock’s price rises, the same thing happens in bonds – the more people buy bonds, the lower the interest rate.

To make the interest rate go this low, an absolute ton of money is flowing into the bond market which indicates incredible fear in the stock market.

For a point of comparison, the yield on the 10-year Treasury was over 3.00% less than two years ago.

S&P Drops 7% on open, Triggers “Circuit Breakers”

The market indexes dropped so swiftly at the open on Monday that all trading was halted for 15 minutes just 4 minutes after the market opened, reported CNBC.

The SEC implemented certain rules – such as a dramatic and substantial selloff in a short timeframe – where all trading would be halted to give the market a break.

These rules are referred to as “circuit breakers” in the way they’re supposed to operate similar to circuit breakers in an electrical system – shutting off power if there is a sudden overwhelming spike in usage.

How rare is it to have the circuit breakers trigger?

It’s rare. The last time they triggered was in October 1997, nearly 23 years ago. Not during the 2008 financial crisis. Not even during 9/11. Yes, Monday’s market action was positively insane.

Roll Out the Red Carpet for Relief… or Not…

After the close on Monday, President Donald Trump said he would meet with Senate and House Republicans to discuss “a possible tax relief measure” to provide “a timely and effective response to the coronavirus,” reported CNBC.

Funny. The last time I checked, tax relief doesn’t cure a coronavirus. Perhaps we’d be better served by following medical professionals’ suggestions of spending a few billion on therapy and vaccine development rather than payroll tax cuts ? 

I’m all for keeping the economy secure, but it won’t be secure until every country’s citizens stop running around like their hair’s on fire over COVID-19. 

On Wednesday, Trump further fumbled the ball during a speech on television after suspending all travel from Europe to the U.S. for the next 30 days, following it with statements reiterating his concern for a strong economy. While no one wants a weak American economy, citizens are more concerned about, well, not dying as opposed to worrying about their portfolios.

Traders were not impressed and the index futures plummeted into Thursday with the worst day in the markets since Black Monday in 1987.

Next Week’s Gameplan

Despite the bounce on Friday, there will be no bottom to this bear market until COVID-19 is contained with a therapeutic treatment. A vaccine would also benefit the markets.

Until then, all news is bad news, and while the White House will try to use financial policies to alleviate economic strain, this crisis is not man-made, it’s biological, and the solution will have to be biological, too, not policy.

For the moment, I have been adding to positions here and there, carefully reserving dry powder for what could be potentially bigger and bigger selloffs.

We’re not out of the woods, yet.

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

As I expected last week, the Bitcoin Bulls lost momentum on their second try getting through The Line That Shall Not Be Crossed, and Bitcoin crashed down into the Support of Last Resort on Sunday.

This is the third time since Bitcoin bottomed at $3128 in 2018 that Bitcoin’s tested the Support of Last Resort, and, as I’ve found with cryptocurrency, the third time’s usually the charm, and the Bearish Case I described in last week’s Crypto Corner played out.

And, then, Thursday happened…

Remember how I always say cryptocurrency can make the most steel-willed trader’s stomach flip?

Yeah.

I don’t know what the hell happened this week.

In one 24-hour period from Thursday-to-Friday, Bitcoin lost more than -50% of its value and then bounced +50% off of its lows.

How to read the chart:

• The red trendline is the Line That Shall Not Be Crossed
• The green trendline is (was) the Support of Last Resort
• The blue trendline is a potential Next Support of Last Resort
• The green horizontal line is the weekly high of $9214.67.
• The red horizontal line is the weekly low of $3858.00.
• The yellow horizontal line is the 2018 bottom of $3128.89.

So, what now? 

First, Thursday’s positively insane price action is exactly why I always say you positively must have a trading plan in advance, otherwise, this kind of move will more likely scare you out of the market rather than give you the motivation to buy.

Do whatever you can to take emotion out of investing. It’s not helpful to panic.

Truthfully, as is often the case of cryptocurrency, I have no idea where it will go next.

Some analysts believe Bitcoin is headed under $1,000. Others believe it will see $20,000 before the end of 2020.

It’s six-to-one and pick ’em. Tread carefully.

The Bullish Case

Bitcoin is capable of anything, so maybe this is the recharge it needs to try to break 2019’s high near $14,000. However, even when bullish, it typically takes Bitcoin weeks, if not months, to recover from this kind of pullback. However, the immediate recovering bounce could be promising.

The Bearish Case  <– The more likely outcome

Unfortunately, past experience with similar drops in Bitcoin has taught me to expect more bearish price action following moves like this, even after the oversold bounce from the $3858.00 bottom.

Because of the ferocity of the selloff, I don’t anticipate the $3858.00 low to hold if it’s tested. Worse, given how close we are to the 2018 low of $3128.89, I have little faith in that support, either. 

From my analysis, you can see a red trendline in the lower-left hand corner of the chart from past moves in 2017 and earlier. I believe it may be the next real support, and, wait for it, it’s currently around $2100.

This figure is significant because it is almost -85% from Bitcoin’s 2019 all-time high – nearly the identical severity of pullback Bitcoin experienced when it pulled back from $19,891.99 to $3,128.89 (a drop of -84.27%) in December 2018.

I’m hoping I’m wrong, but I’m planning as if I’m right.

Bitcoin Gameplan

When it comes to Bitcoin and other cryptocurrencies, Buying in Stages is the only strategy that stops me from going completely insane when an asset class I’m trading drops in excess of -50% in 24 hours, followed by a bounce regaining 50% of the drop.

Just to put all of this in perspective, Bitcoin dropped from the green line (the past week’s high) to the red line (the week’s low) and nearly vaporized all of the gains all the way back to December 2018 (the yellow line at $3128.89), and it did the entire move in less than 48 hours.

I mean, check this out: Bitcoin has a weekly high of $9214.67 and a weekly low of $3858 – that’s a spread of 58.13% from the high to the low in one week!

Current Allocation: 20.671%
Current Per-Coin Price: $4,970.19
Current Status: -1.435%

Over the past week, I went from having 2.1% of my desired allocation to now holding 20.67% of my desired allocation. My buys over the selloff (my lowest and largest one was at $3976.09) lowered my average per-coin price -44.46% from $8948.89 per coin down just last week down to my current $4970.19 per coin.

As of writing, my position is down -1.435%, however, I expect that to change for the negative should Bitcoin test (and break through) its 2018 low as I expect it might.

Bitcoin Buying Targets

Based on past support levels, Moving Averages (both Simple and Exponential), and a positively terrifying past trendline, I’ve come up with the following buy targets:

9.40% @ $3177
12.03% @ $2467
14.19% @ $2118
21.74% @ $1388
9.12% @ $911

Bitcoin Selling Targets

For the moment,  this is an accumulation stage. Given the severity of Bitcoin’s selloff, this position carries a long time horizon (potentially many months if not longer).

Bitcoin’s downward moves are followed by significant gains to the upside once the crypto has found a bottom. While I hope we have bottomed at $3858, I think that outcome is very unlikely.

Unless Bitcoin bounces significantly higher, I won’t be taking profits, with preference given to the pain of being underwater rather than the FOMO from selling too early.

Once again, this points to why professional traders (I’m not one) say that a position’s size is more important than the price. By only having a 20.671% allocation – even following a 50% selloff – I can approach the situation analytically without emotion and choose the outcome I’m comfortable with.
 

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 rebounded +343% from $3128.89 to $13,868.44.
• From June 2019, Bitcoin dropped -53.64% to a low of $6430.00 in December 2019.
• From December 2019’s low, Bitcoin rebounded +64% from $6430.00 to $10,522.51.
  
• In March 2020, Bitcoin dropped -63.33% to a low of $3858.00, mostly in 24 hours.

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.