Trader Note

When markets are stable, Monday pre-market is excellent for chop-chop on no news (Fed later in the week).

2018-02-05 Week

 

Market Selloff to Continue? Yes. Crypto Buying Oppertunity

This Week

Look for a reversal of NFP Friday moves into Monday. Any move higher will be an opportunity to sell (see below).

RBA may move rates. If they do, expect that the Australian housing market would feel the crunch. That will take every other Australia investment with it (stocks, AU dollar, and iron ore).

German, USA and Japan bond auctions may give markets a freight. Use caution trading around these releases. Expect that these auctions may be an early indication for investors desire to tie money up pegged to government debt. Also expect that these auctions will be an early indicator of higher yields. That will be indicative of a move higher in borrowing costs and a constriction in credit.

    

Selloff To Continue?

The question is: Will this selling will continue?

Near term it may stall, but the long term outlook is for lower markets.

 

NFP came in higher, but markets still sold. This selling action started in Asia but continued throughout world markets. On Monday, prices may stabilize but it is likely that the selloff will continue. It will be a good opportunity to add to a long term short position.

Stocks have had a disconnect with bonds. That disconnect has meant that finding correlating trades is a challenge. Stocks, because of money printing, have had an unprecedented run. After a run higher, there is often a pullback. Estimates are that this drop in stocks could occur within 3 months or 2 years. My estimate is closer to 3 months, but I have been wrong about this market and my expectations of it moving lower.

I suggest taking profits out at current levels, even if you miss another 5% to 10% move to the upside, it is still better than trying to get out when prices are dropping like a brick. When these markets fail, it will be spectacular. Expect a 50% move lower. Sell that before that move, if you are timing it well; Sell during that move if you are more cautious.

Bond markets have had turbulence. This should not occur in bonds. People buy bonds to generate consistent returns in a stable investment. However, the bond market has seen some big moves. EU and Japanese interventions in the bond markets will continue to make these a turbulent place to invest. That is good for a day trader taking a chop out of every big bond move on the futures market. It is not so good for low risk investors looking for stability.

US Bond and T-Note futures have been selling off. As the Fed pulls back from their QE program, selling will likely continue. Rates have been low for too long, so a move of yields into higher levels should be expected. However, pair that with a potentially falling US dollar (move away from USD as a medium for international exchange), and there may be some real chaos in the market.

An early indicator of risk aversion is high yield bonds. High yield has been dropping, giving indicators of sell signals that the stock market (correlated) has not headed. However, longer term, it is common for stocks to correlate more closely with high yield. As the spread widens, there is a greater chance that stock prices will move lower to catch up to high yield prices.

Gold also had selling pressure. This is one asset that is used as a hedge against failing currency and dropping markets. Much of this selling pressure is likely pushing paper gold prices to try to make dollar assets look less miserable. Long term, any selling in gold should be considered a buying opportunity. Any pressure on gold prices will not be able to be sustained in a broader market selloff.

Crypto has also felt the crunch. The selloff in crypt was not market driven as much as news driven (this is still a highly speculative market). With only a 5% use, there is still plenty of room for new money to enter this market. As prices dip, investors on the sidelines will be looking to enter. Longer term investors are buying on bargain hunting. Big holders are true-believers and are unlikely to exit this market soon. Thus, cryptos are a good place to make money while watching the stock and bond markets burn.

Move into cash early. Move into alternative investments if you require yield and risk. Good places to watch will be oil (fuel), gold (precious metals), food (grains, softs, and meat) or crypto currencies. Hedge against the failure of markets before it happens. Hold hard assets if you want to preserve value.

    

Crypto

Crypto has taken a hit. Some of that action may be fear in the market and some may be profit taking. Day traders were looking for a rebound into higher numbers, but the selloff has the appearance of a sustained move. The appearance of a move is NOT a move.

Negative press has hit the crypto space lately, but that won't provide enough selling pressure to sustain a move. Korea is back and forth about desires to regulate these markets. Russia will soon be issuing a crypto-ruble. Chinese sellers, leading up to New Years, have been exiting markets. The theft of 400 million worth of ripple has been scaring some people, too. None of that news should scare a trader, though.

Nothing has really changed in the crypto space. Crypto is still a viable alternative to banks. It is still a place to trade. Crypto is as risky as stock investments, considering current valuations. It is a good hedge against money printing, even as the EU and Japan expect to continue to print money. So as a long term move, this move lower is just a blip.

I am buying at these levels (Bitcoin @ US$8200). I estimated, in January, that the move could go lower (Bitcoin near US$7000), but that likely will not last long. There is very strong support near $6500, so any move below $8k will likely find support. However, be greedy with your entry point. Let those selling in weakness push their money into your hands. As the news cycle flips, the upward move will be just as sustained.

 

 

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