This Week in Barrons - 2-4-2018

This Week in Barrons – 2-4-2018:

Thoughts:

   Cryptocurrencies (to many) are a lot like the Kardashians: we have all heard of them, but we’re not really sure why.  They’re overexposed by the media, but somehow shrouded in mystery.  Here are this week’s Top 10 Crypto Questions:

   #10 – Is there a new crypto ETF coming?  Currently there is the Bitcoin Investment Trust (GBTC) that is somewhat ‘weirdly’ priced and has excessive fees.  Last week Harvest Portfolios filed with regulators to introduce an ETF that tracks blockchain technologies.  It has a management fee of 0.65% and seeks to replicate the performance of the Harvest Blockchain Technologies Index.  It begins trading next week on the Toronto Exchange under the ticker: HBLK.

   #9 – What’s the latest Bitcoin projection?  Ran Neuner, the host of CNBC’s Cryptotrader, said last week that Bitcoin will hit $50,000 by the end of 2018.

   #8 – How is Ripple (XRP) doing since it’s big fall?  Ripple has landed one of its largest clients – the Santander Group, and announced a mobile app powered by the company’s distributed ledger.   The app will be rolled out in Spain, Brazil, the U.K., and Poland.  Customers will be able to use its digital wallet, its same-day cross-border payments feature, and its personal finance manager to solve any person-to-person payment issues.

   #7 – What is UNICEF doing with Ethereum?  UNICEF has launched Game Chaingers in an effort to bring together gamers and crypto-enthusiasts from across the globe to ‘mine’ Ethereum for UNICEF.  Joining the cause is as easy as going to a website and providing a few details about your system so that they can configure and install their mining software.

   #6 – Is Circle acquiring crypto exchange Poloniex:  According to a report on Modern Consensus, Circle (a multi-currency money-sending app) is in talks to acquire Poloniex – a major US-based cryptocurrency exchange.

   #5 – What is Amara’s Law?  Amara’s Law is shown below: “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.”

The above is a graphical depiction of a common pattern that arises with each new technology.  It is often thought that the growth of Bitcoin/Blockchain adoption is modeled after the above technological adoption curve.

   #4 – What happened last week to cause the crypto-market to push the panic button? It’s been a rough couple of weeks in crypto-land.  Bitcoin dropped below $9,000, and total crypto-market capitalization is currently hovering near $400B – less than half of its Jan. 7^th $830B valuation.  Lately, a negative stance against Bitcoin was taken by India’s Finance Minister.  During an annual budget speech, Arun Jaitley noted that Bitcoin is currently not recognized as legal tender, and also emphasized that India “will take all measures to eliminate the use of crypto-assets in financing illegitimate activities or as part of the payment system.”  However, nowhere in Jaitley’s statement did he say that Bitcoin is banned in the country, and in fact its use as an investment is still entirely legal.  

   #3 – Should I buy the crypto-dip?  Nobody can tell you that the bottom is in, but averaging your investment downward is a good way to reduce your average cost of entry – if the crypto-marketplace continues to fall.

   #2 – What’s up with Stellar and Stripe?  Stellar is the cryptocurrency founded by Ripple co-founder Jed McCaleb, and Stripe is the Silicon Valley payment processor that incubated Stellar.  Stripe just announced that it would discontinue support for Bitcoin due to: lengthy transaction times, increasing transaction failure rates, and growing fees.  Stellar announced that Mobius Network raised $39m in an initial coin offering built on top of the Stellar network.  That was the largest token sale on the Stellar network to date.  Mobius chose Stellar over Ethereum because ETH was too: "slow, expensive and insecure.”

   #1 – Will the U.S. begin to regulate cryptos?  U.S. regulators made it clear that they are keeping close tabs on cryptocurrencies.  Securities and Exchange Commission chairman Jay Clayton and Christopher Giancarlo (his counterpart at the Commodity Futures and Trading Commission) said they are devoting a significant portion of their resources to monitoring the industry.  Separately, Clayton took lawyers to task who have been advising ICOs that push the legal envelope. "I have instructed the SEC staff to be on high alert for approaches to ICOs that may be contrary to the spirit of our securities laws and the professional obligations of the U.S. securities bar," he said, a bit ominously.  Clayton also indicated that his agency is taking a hard look at "Blockchain-R-Us" companies that change their names to something blockchain-related to juice their stock prices.  And the International Monetary Fund (IMF) called for international co-operation among regulators to tackle the problems it sees cryptocurrency creating: money laundering, terrorist financing, tax evasion, fraud, and investor losses. Because we all know how well governments co-operate and co-ordinate.

The Market:

“I bought the dip – why didn’t it go back up?”

   So, what happened this week that caused a 1,000 point pull-back in the DOW?  Was it:

-       The fear of rising interest rates,

-       The President’s State of the Union address – 3^rd longest in history,

-       Trump’s ‘releasing the Kracken’ surrounding the Republican memo,

-       Hints that the European Central Bank might actually begin to taper,

-       $12B worth of funds that had to be rebalanced,

-       The 10-year Treasury bond moving to 2.8%,

-       The personal savings rate dropping to 2005 levels, while credit card debt soars higher,

-       The FED telling Wells Fargo to cut 4 board members, and not allowing the bank’s assets to surpass 2017 levels until it fixes its problems,

-       A lack of SHORTS in the marketplace – that left no one buying stocks on the way down; thereby, producing a larger than expected downturn,

-       Expanded market inefficiency – producing a dramatic uptick in volatility,

-       Last month’s wage growth that exceeded all expectations – giving the FED reason to hike interest rates faster and higher,

-       A much weaker dollar.  In a falling dollar / rising interest rate environment – you almost have a perfect storm.  If you’re another country, why would you want to hold U.S. Treasuries?  As the dollar declines, bonds get annihilated, and interest rates rise in a hurry – impacting everything from homebuilders to automakers.

-       OR was it everything added together and shaken (not stirred) that gave us a pretty soggy week in market-land?

   I’ve seen it happen too many times where: (a) longs overstay their hands, (b) claiming they will never sell, and (c) then end up puking out their positions right where smart money is buying back in at the lows.  Traders call it the ‘porcelain alter’ trade.  The graphs below compare the past 3 months in 2017-2018 and the 2008 financial crisis/crash.  By comparing the severity of the rise to the panic associated with the 2008 financial crisis - your only conclusions are that: (a) we have risen much faster than we should have, and (b) we should have a lot further to fall going forward.

    After four weeks of strong gains, U.S. stocks and the three major benchmarks fell sharply last week.  The DOW tumbled by over 1,000 points to 25,521 – putting in its worst weekly performance in 2 years.  All 11 S&P sectors fell on the week, and at least 36.2% of all S&P 500 stocks fell by at least 5%.  The NASDAQ also was down over 3.5% last week.  U.S. stocks lost almost $1T, and over $511B on Friday alone.  Cincidentally, the sharp fall of U.S. stocks came as the Labor Department presented a stronger than expected January employment report.  The unemployment rate remained at 4.1% - the lowest since 2000.

   Despite the severity of the drop, Friday’s selling was orderly.  The jobs report showed that the average hourly wage grew by 2.9% year-over-year – the largest increase since June 2009.  Investors worried that a big wage growth number might be the biggest risk to the stock market rally – because it would give the FED more reason to raise rates.  It was inevitable that inflation worries were going to resurface, and that further caused a rise in bond yields with the 10-year Treasury hitting a four-year high on Friday. 

   Last week also showed us a new face in healthcare.  On Tuesday, three U.S. corporate giants announced the formation of a new healthcare company that is “free from profit-making incentives and constraints.”  Amazon’s Jeff Bezos, Berkshire Hathaway’s Warren Buffet, and JP Morgan’s Jamie Dimon are determined to form the world's largest, for-profit healthcare corporation focused on transforming the failing U.S. health care system.  Stocks of the leading pharma, drug store, and insurance companies tanked after the announcement.

-       CVS and Walgreens declined by 4%,

-       Express Scripts was down by 7%,

-       United Health, Aetna, and Humana were down by 3%, and

-       Cigna and Anthem fell by over 5%.

This is only the beginning of major changes for the insurance business, and the start of a restructuring for the entire healthcare industry.

   Last week the North American cannabis sector(s) experienced a dip in investor confidence which led to a heavy decline in the ‘weed’ stocks.  The North America Marijuana Index posted a 27.2% decline due largely to poor performance among Canadian stocks.  Investors in the Canadian market found it difficult to financially  comprehend Aphria’s (APHQF) $826m bid to acquire Nuuvera.  First, Nuuvera only became a public company three weeks ago.  Second, it has yet to secure a license from Health Canada to grow and sell cannabis.  And third, the company’s only significant assets are in Germany, Italy, and Spain.  The proposed merger seems unjustified, but is a sign that Canada’s major cannabis companies are looking at international markets for opportunities as the domestic market prepares for the marijuana legalization this coming summer.  The wave of panic selling that happened on Friday means that the investor high covering the Canadian marijuana industry has dissipated for the time being.

   At a macro level, in 2008 we would have considered last week – just another week.  However, this market is showing signs of moving from an 8-year period of efficiency to a period of inefficiency – as demonstrated by January’s continued weekly index movements of over one standard deviation.  These movements are (in part) caused by the severe downward movement in the U.S. dollar – which ‘crushed’ the bond market and in turn pressured the financial stocks.  If the 10-year Treasury bond remains above 2.8%, we should see continued pressure on financials which will prevent the overall market from moving higher.  The S&P is currently sitting at 2756 – with its ‘daily mean’ all the way down at 2439.  This means that if we simply ‘revert to the mean’ – a drop of an additional 300 S&P points is in the cards.  That is exactly what happened in 2015 when (for a month) we dropped over 200 points.  If that is the case, we will continue to see increased volatility for the foreseeable future.  The volatility index (VIX) just caught its stride on Friday closing above 16, but it really gets interesting (and a little panicky) above 20.

   At the micro level, any gap-up on Monday will be aggressively sold into by traders.  If (however) Monday brings us more movement to the downside, this will invite capitulation – followed by a soft buying effort higher.  Next week could easily show us wild short-covering rallies to the upside.  After all, we just lost 1000 DOW points in one week, and nothing goes straight up or straight down.  If this bounce does not reclaim at least half of what we lost, that’s a bad sign and means when we roll-back over we will be taking out Friday’s low. 

   If I were to ‘guess’, I think that there is more downside to come, but not until we experience an early week bounce.  This is the market’s first 3% pullback since what feels like forever, and the technicals are suggesting the pain may not be over.  I also think that the U.S. Dollar Index is ready for a bounce higher.  But I don’t think that volatility will subside all that much, and that is why I see additional pressure on the markets at the end of the week – especially with another government shutdown looming.   

  As a TIP, remember to reduce your trading position size by 1/3 – when you’re trading to the downside.  Markets go down faster than they go up.

Tips:

Top Equity Recommendations:

-       Marijuana & Energy stocks:

o   Aurora (ACBFF = $10.81) – higher w/ earnings on Feb 14^th,

o   GW Pharmaceuticals (GWPH = $138.55) – higher w/ earnings on Feb 8^th,

o   Canntrust Holdings (CNTTF = $9.35),

o   GAStar Exploration (GST = $1.30),

-       Options:

o   BIDU ($233.17) - higher w/ earnings on: Feb 22^nd,

o   Costco (COST = $190.99) – looking for a move into $205,

o   Deer (DE = $164.96) – not liking stock movement,

o   Disney (DIS = $108.70) – looking for higher w/ earnings on Feb 6^th,

o   First Solar (FSLR = $66.44) – moved into an ‘over-sold’ area / trying to be patient w/ earnings on Feb 21^st,

o   Lululemon (LULU = $78.62) – holding above the 21-EMA / momentum is still rolling higher,

o   Micron (MU = $40.82) – closed below the 100-EMA / watching until Wednesday.

o   Wynn (WYNN = $166.56) – over $170 by Feb 16

Top Crypto Recommendations:

-       Ethereum (ETH),

-       Nano (XRB),

-       Lumen / Stellar (XLM),

-       NEO, and

-       SiaCoin (SC)

   The total crypto-market cap dropped by more than $100B last week, and for the first time in 2018, the crypto-market cap landed below $400B.  The reasons behind the crypto-panic are: (a) increased regulations, (b) hacking, and (c) a crackdown by various governments.  Additionally, the last leg of the rally looked more like FOMO (fear of missing out) than reality.  But when the mainstream media highlights negative news – investor sentiment is affected and often retail traders panic and dump their positions out of FUD (fear, uncertainty, and doubt).  I consider this pullback a buying opportunity; however, all cryptos are not created equal.

   BTC/USD ($9,190):  Bitcoin is in a firm ‘bear’ grip.  It has declined about 55%  from its high, and has retraced almost 78.6% of its latest rally leg.  In 2017, the RSI indicator fell into the oversold level on three occasions, and all of them were buying opportunities.  Aggressive traders can look to buy in the current zone and hold at least to the overhead resistance of $10,700.  I anticipate additional selling between $10,700 and $11,300 (the 20-day EMA).  The next leg down will confirm a bottom if it doesn’t break the most recent low of $8,000.  If the low breaks, the downtrend can extend into the $6,000 level. Therefore, long-term traders should wait for a couple of days before buying.  

   ETH/USD ($964):  Ethereum could not escape the panic selling that gripped the crypto market.  On Friday ETH broke below its 50-day SMA, and found support around $768, just below its previous panic low of $770.  It should face resistance at the $1,025 level.  So, the next buying zone should be either (a) above $1,025 or down between $770 and $820.  

   XRP/USD ($0.95):  Ripple has not fared well in the current decline.  At Friday’s low of $0.61, it had declined 81.5% from its lifetime high of $3.317.  If $0.61 breaks, a fall to $0.24 is likely.  Make sure $0.61 holds, before taking any additional investment into Ripple.

   XLM/USD ($0.44):  Stellar has broken below its 50-day EMA, at one point broke below support at $0.41 and even touched its final support level of $0.296.  Strong buying at that level helped XLM regain critical support at $0.41.  If that level holds, we may see a range bound action for the next few days.  Steller will likely become a buy once it breaks out of the upper end of the range at $0.64.

   NEO/USD ($123):  NEO fell close to its critical support level of $93.53 which resulted in strong buying.  The $132 level will act as resistance, but NEO is one of the stronger cryptos out there as it has remained above it’s 50-day EMA during this contraction.  I’m looking to buy NEO on a fall to the $105 level.

Note: Bottoms are not formed in a single day.  After such a steep decline, we are likely to see a pullback and a few days of volatile price action.  Therefore, long-term traders should wait for a successful retest of the lows before buying.

   To follow me on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm. 

Please be safe out there!

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