Novum Digital Asset Alpha – 9 June 2020

A terrific Tuesday to you! 

Have you ever wished for a second chance? A do-over? Regretted something you said to your boss the day before and wanted to go back in time and start from scratch? 

Well investors may have that chance. 

Because U.S. stocks have erased ALL losses for the year. 

Whether it was the Fed’s stimulus, or optimism that economic activity is rebounding, the S&P 500 (+1.20%) roared ahead on Monday to close above 3,200 points at 3,232.39, back above the level at the start of 2020. 

Gains were broad-based, with many sectors that had been shunned during the coronavirus pandemic, such as hospitality, leisure and aviation, returning to the fray. 

Asian stocks opened marginally higher on Tuesday, amidst a mashup of optimism and caution. 

Hong Kong’s Hang Seng Index (+0.03%) and Seoul’s KOSPI Index (+0.55%) were up, while Tokyo’s Nikkei 225 (-0.73%) was down. Sydney’s ASX 200 (+2.60%), which had been closed on Monday for a holiday, saw it play catch up, which allowed it to outperform its Asian peers. 

The dollar continued its slide, as investors started venturing into more risk-biased assets and re-entered positions in emerging markets. 

U.S. 10-year Treasuries remained unchanged, investors are rotating into risk, but not with reckless abandon, and stands at 0.942%, up slightly from 0.899% the day before – yields normally rise when bond prices fall. 

Oil held on to most of its decline, with WTI Crude Oil (Nymex) (+0.89%) up slightly but still well below US$40 a barrel, at US$38.63, after Saudi Arabia said that it wouldn’t continue its additional, deeper output cuts after June. 

Gold peeked above US$1,700 again, with Comex Gold (+0.01%) trading at US$1,705.30, on the back of concerns over excessive liquidity in the financial system and as an outside hedge against inflation. 

Bitcoin (+0.08%) had a choppy 24 hours, trading within a broad range between US$9,440 to US$9,880 but ultimately went nowhere and now tracks the middle of that range at US$9,700 (GMT 0100).

But risks remain and the easiest way to tell is by following the money. 

If The Worst Is Over, Some Are Not Buying It

By all ordinary measures, the stock market should have tanked by now, over a quarter of Americans would be unemployed and the world would be heading towards the worst economic conditions since the Great Depression. 

But thanks to timely and concerted intervention by central banks all over the world, markets did not fall through the floor and the world has not plunged into chaos. 

Perhaps we’ve learned from the lessons of the Great Depression.

Certainly extraordinary fiscal and monetary intervention, has somewhat insulated the global economy from having to confront the economic realities wrought by the coronavirus pandemic. 

But if that’s the case, there are more than a handful of investors who are not buying into the narrative, as evidenced by the sheer amount of money that remains in cash or cash equivalents. 

In a research note issued last Friday, Deutsche Bank noted that money market assets, which consist of highly liquid assets including certificates of deposit, interbank loans, money market funds, Treasury bills, repurchase agreements, commercial paper, and short-term securities loans, were still at their financial crisis highs of US$5 trillion. 

One reason for that level of caution of course, is the risk of a second wave of coronavirus infections.

Another risk is that protests in U.S. cities following the killing of African-American George Floyd at the hands of a white policeman in Minneapolis, may spark off further unrest that continues to permeate through the country and stymie any prospect of a full reopening.  

It could also simply be an overabundance of liquidity.

But with New York City, the most densely populated city in all of North America and the epicenter of America’s brush with the coronavirus, reopening yesterday, the world is watching with cautious optimism. 

Already some U.S. states are reporting a rise in the number of new infections after having lifted restrictions on social and business activity, including California, Utah, Arizona, North Carolina, Florida, Arkansas and Texas, which have all logged an increase in confirmed coronavirus cases, according to a Johns Hopkins (a hospital) tabulation of a 5-day moving average from over the weekend. 

And while some of the increase in cases can be attributed to more extensive testing being made available, a spike in occurrences of the coronavirus would have been expected anyway when states opened up. 

If investors are concerned about a resurgence of the coronavirus pandemic, markets are certainly not reflecting those concerns. 

One of the reasons of course is that statistically, the vast majority of coronavirus symptoms are mild, the mortality rate is low and even in Italy, which was the worst hit country in Europe by the pandemic, has seen the rate of new infections and fatalities steadily decline since May. 

Investors are just not as “frightened” anymore of the coronavirus pandemic – a fear they do have however, is the fear of missing out (“FOMO”) on the market rally. 

Globally, stocks have climbed back to their levels in February, when the coronavirus pandemic first started spreading rapidly outside of China. 

And with the Fed expanding its Main Street Lending Program, allowing more companies to participate and lessening the burden on banks that create the loans, small cap indices like the Russell 2000 (+1.97%) have soared ahead of blue chip indices like the Dow Jones Industrial Average (+1.82%). 

Technical Disconnect

But with a slew of negative economic data and corporate earnings reports due in the coming weeks, it’s hard to fathom the depth and extent of investor optimism in stocks. 

The World Bank has already warned that the global economy is set to contract the most this year since the Second World War. 

And the Business Cycle Dating Committee (not that kind of dating) of the National Bureau of Economic Research, declared on Monday that the longest period of U.S. economic expansion on record came to an abrupt end in February, marking the end of the 128-month expansion that started in mid-2009. 

The Dating Committee (unfortunate choice of name that) added that the magnitude of the decline in employment and production across the economy meant that the U.S. is already in a recession. 

Tell that to investors. 

On Monday, stocks of the companies worst hit by the coronavirus pandemic, also outperformed other stocks, particularly in the technology sector. 

Cruise operators Carnival (+15.81%) and Norwegian Cruise Line (+19.75%) all racked up high double-digit percentage gains. 

Not to be left out of the rally, airlines also rose, with United Airlines (+14.82%), American Airlines (+9.25%) and Delta Airlines (+8.23%) all posting gains. 

Casino operators also saw gains with MGM Resorts International (+9.39%) and Wynn Resorts (+7.08%) all rising. 

But even with Monday’s gains, all of these stocks are still in the red for the year and having priced in substantial levels of optimism, are worth giving a miss, regardless of FOMO. 

To be sure, the world that we are emerging into is vastly different from the one we left behind pre-coronavirus. 

And it’s still too early to say if our behaviors haven’t changed forever. 

As companies adapt to remote working, there is the potential for cities and urban centers to empty out, as employees seek lower cost housing and a better quality of life in less densely populated areas. 

Workers may commute less, being freed from physical location to determine their employment, while those in service level jobs may see their real incomes increase if rents in dense urban centers fall. 

Travel, especially for business, may be scrutinized more carefully by firms, meaning that all but the most essential trips are likely to be cancelled in favor of video conferencing. 

That means less passengers in the front of the plane (where airlines make their most profits) and less flying in general. 

But people will still want to travel, they just may not have the means to travel in Business Class, which means that airlines like Southwest Airlines (+6.31%), which only serves the U.S. domestic market will likely continue to do well. 

Americans may start to explore more of America than ever before and Southwest Airlines is the most likely to benefit from that trend. 

The demand for cloud computing services is also likely to be higher than ever as companies deal with decentralized employee basses and technology companies at the forefront of providing those services, including Microsoft (+0.62%), with its Azure Cloud, Amazon (+1.65%), with its Amazon Web Services and Google (+0.56%) with Google Cloud will only see demand for their services continue to grow. 

And the hardware that underpins cloud computing?  

Nvidia (-1.29%) – which recently launched its newest A100 chip, one of the most advanced chips that can support data centers and remote processing – a theme that will endure in a post-coronavirus landscape – will enjoy consistently improving revenue prospects. 

In the aftermath of the financial crisis, American households saved a larger portion of their incomes than ever before and with some incomes effectively going to zero at the height of the coronavirus pandemic, that trend is likely to perpetuate. 

Retailers which offer value-for-money and have strong online stores and curbside pick-up will continue to do well, including Target (+0.69%) and Walmart (-0.26%), as Americans look to manage their household budgets and cut back on discretionary spending. 

These companies reflect part of the broader trends that the coroanvirus pandemic ushered in and while they have significant growth potential, are also resilient if unforeseen shocks should weigh in, such as a second wave of infections. 

Bitcoin Bouncing Between Boundaries

Yesterday we noted that Bitcoin appeared to be consolidating at US$9,700 and a bullish pennant had formed again, suggesting another push. 

We noted that if Bitcoin could sustain a push past US$9,800, to expect another rally towards US$10,000 – but that was not to be. 

Bitcoin did make a push past US$9,800, but it was unsustainable, leading to a very rapid collapse and testing the US$9,600 level. 

The long trade we suggested yesterday was to consider entering at US$9,750 and taking profit at US$9,900 with a stop loss at US$9,670 – this trade was stopped out. 

While the short trade we suggested yesterday was to wait for an entry at US$9,800 and short all the way down to US$9,400, taking profit at US$9,600 and US$9,500 along the way, with a short cover at US$9,900 – this trade was in the money. 

Ultimately, Bitcoin was poised to test higher levels yesterday but the rally lost steam.

Yet there are more than a handful of reasons to remain bullish on Bitcoin in the mid-term. 

For starters, there has been an increase in outflow of Bitcoin from exchanges into private wallets – normally when a selldown of Bitcoin is imminent, we have observed large movements of Bitcoin into exchange wallets – this current trend of outflows seems to suggest that traders are intending to hold on to Bitcoin for longer periods of time, or it could also mean that they are looking to cash out using OTC (over-the-counter) providers.

But Bitcoin exchange outflows have also dovetailed with an increase in Bitcoin mining revenues, with verifiable on-chain data showing that miners sold less Bitcoin than they mined in the past week. 

Bitcoin miners exert significant sell pressure on Bitcoin’s dollar price and their absence in the sell queues suggests that the miners themselves anticipate a likely upside. 

Yet all that could change in a Bitcoin minute, as demonstrated by yesterday’s volatility. 

Again, Bitcoin is seeing consolidation at US$9,700. US$9,600 is a level of support but is not impregnable, while US$9,800 is a level of resistance but not impenetrable, traders are well advised to trade the intraday volatility instead. 

Going long, consider an entry for Bitcoin at US$9,700 and timing an exit at US$9,850, there is a distinct possibility for Bitcoin to make another run for US$9,800 again and overshoot. Set a stop loss at US$9,675. 

Shorts can consider waiting till Bitcoin makes another push, a touch to US$9,900 is likely so time an entry at US$9,890 and short sell all the way down to US$9,600, taking profit at levels along the way, including at US$9,700. Place a short cover at US$10,000 – unlikely in the immediate term but you never know.

Bitcoin continues to mature but still remains a very much unregulated asset in a very much unregulated space. 

With the global economy in tatters, lawmakers are understandably preoccupied with bread-and-butter issues to concern themselves with the rise of Bitcoin – which is an opportunity for the space to grow unencumbered. 

Don’t you just hate it when everything and nothing happens? That’s just another day trading Bitcoin. (Source: Novum Alpha internal charting tools.)

Ethereum’s Ground Hog Day

Don’t you just hate it when you’re driving to a new place and then when you try and leave you go around in circles, maybe run over a mailbox and then end up right where you started?

Frustrating as it may seem, that is exactly what happened in the case of Ethereum. 

For the better part of the last 24 hours, Ethereum essentially went nowhere, dipping slightly and then seeing a massive rally that sparked a major sell-off before returning back to its equilibrium at US$243. 

Yesterday we suggested that those looking to go long on Ethereum should probably wait it out and that the next level was US$250, but if a trade had to be made, enter at US$244 and sell at US$249 with a stop loss at US$241 – this trade was in the money. 

We advised that shorting Ethereum would need a setup at US$247 and shorting all the way down to US$239 with a short cover at US$250 – another trade that was profitable.

Ethereum ultimately failed to hold the consolidation at US$249, which could have precipitated a push towards US$250. 

As with Bitcoin, failed attempts at goal for Ethereum are more often than not, punished with outsized downward swings.

Ethereum’s rapid bounce off US$240 suggests that it has a strong support (in the next 24 hours) at that level. 

Traders looking to long Ethereum can consider entering at US$243 and looking to take profit at US$249 with a stop loss at US$242. 

Shorts for Ethereum can consider timing another entry at US$249 and shorting all the way down to US$241, taking profit at regular intervals along the way – setup a short cover at US$251 – unlikely again, but you never know.

Ethereum is moving within a more tightly defined channel within the next 24 hours and there is greater potential for a breakout than there is for a collapse. 

Novum Digital Asset Alpha is a digital asset quantitative trading firm.

Exclusive access to Novum Digital Asset Alpha’s Daily Analysis is made in conjunction with Bitcoin Malaysia.

The information and thoughts laid out in this analysis are strictly for information purposes only and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws.

It does not constitute a recommendation or take into account the particular allocation objectives, financial conditions, or needs of specific individuals.

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