Novum Digital Asset Alpha – Daily Analysis 1 September 2020 (7-Minute Read)

It’s the first day of a brand new month and I hope that this month is kicking off to a great start for you! 

In brief (TL:DR)

  • U.S. stocks ended mixed on Monday, as the S&P 500 (-0.22%) and blue-chip Dow Jones Industrial Average (-0.78%) took a breather while the tech-heavy Nasdaq Composite (+0.68%) closed up, with similar themes from earlier weeks repeating 
  • Asian stocks opened Tuesday a mixed bag and mostly drifted lower on the back of weakness in Wall Street 
  • U.S. 10-year Treasuries edged up on Monday, with yields dipping to 0.712% from 0.724% – yields generally fall when prices rise. 
  • Oil dipped slightly, with WTI Crude Oil (Nymex) (-0.53%) down at US$42.86 from US$43.09 in the previous session. 
  • The dollar continued its slide against major currency pairs, providing a boost to U.S. stocks and dollar-denominated commodities. 
  • Gold slipped slightly with Gold (Comex) (-0.17%) down at US$1,975.30 from US$1,977.90 in the previous session, for December contracts, but was otherwise more or less unchanged. 
  • Bitcoin (-0.81%) slid on Tuesday down to US$11,600 from US$11,700 in the previous session, as inflows from exchanges continued to lead outflows and despite a weaker dollar (inflows typically signal a preparation by investors to sell Bitcoin on exchanges and is normally a signal of price dropping). 

In today’s issue…

  1. The Retail Investor-Driven Stock Market Rally is Making These Firms Rich
  2. Banking on Bonds May Be Hazardous to Portfolio Health
  3. Bitcoin May Be Poised To Test US$12,000 Again

Market Overview

Themes of technology and Tesla (+12.57%) are returning to the fore as investors may be feeling like it’s ground hog day.
 
Stocks in the U.S. reverted to a familiar pattern where doubts over a recovering global economy (we don’t have a vaccine yet) and uncertainty over the future, saw investors return to previous themes of doubling down on tech stocks and some U.S. Treasuries.
 
A declining dollar has also fueled investor appetite for U.S. stocks, but it was tech stocks in particular which saw the most gains, while other industry firms were laggards, leading to declines in the S&P 500 and Dow Jones Industrial Average, while the tech-heavy Nasdaq Composite continued to gain. 
 
Asian stocks opened mixed on Tuesday before drifting lower, with Seoul’s KOSPI (+0.84%), the only index bucking the trend, while Hong Kong’s Hang Seng Index (-0.96%), Sydney’s ASX 200 (-2.01%) and Tokyo’s Nikkei 225 (-0.19%) were all down. 
 
Given that Asian indices tend to be less tech-heavy than their U.S. counterparts, investors saw a weaker dollar as an opportunity to pick up American stocks, rotating out of Asia, but not every one in the U.S. was a winner, with stocks of Apple (+3.39%) and Tesla being highly favored by investors.   
 
Meanwhile the coronavirus pandemic continues to rage on America, with positive infections now topping 6 million and India fast becoming the new epicenter for the pandemic. 
 
With no new developments on the coronavirus vaccine front and central banks repeating what investors already expect, familiar themes which were witnessed in the early days of the pandemic – buying tech stocks – are resurfacing. 

1. The Retail Investor-Driven Stock Market Rally is Making These Firms Rich

  • Retail investors have been witnessed to dramatically affect the prices of some of the most speculative stocks on American markets 
  • The electronic trading firms that process retail stock trades are making serious money from a retail-led investment boom 
When a friend of mine who’s never taken an interest in investing asked me if he should buy an airline stock, I merely looked at him blankly, trying to wrap my head around the question.
 
Yet a heady mix of coronavirus-induced lockdowns, the advent of zero-fee trading apps such as Robinhood and SoFi, have inadvertently made stockbrokers of us all.
 
A resurgent bull market in equities, in what ought to be the worst economic conditions since the Great Depression, is also helping fuel retail investor appetite for stocks as well. 
 
During the first six months of this year, individual investors accounted for nearly a fifth of the shares traded on U.S. stock exchanges, their highest in a decade, according to Larry Tabb, head of market-structure research at Bloomberg Intelligence. 
 
On some days, individual investors accounted for over a quarter of all shares changing hands, according to data from Citadel Securities, an electronic trading firm that executes orders for firms such as Robinhood and Charles Schwab (-2.07%). 
 
But if Robinhood is driving the stock price of some firms, it’s more of a case that the tail doesn’t wag all dogs. 
 
While Apple (+3.39%) and Tesla (+12.57%) were hot stocks, there was little to suggest that trading on Robinhood had any real impact on their prices. 
 
Instead however, it was the more speculative end of the spectrum where Robinhood users have held court, including stocks of Eastman Kodak (-0.66%), electric-truck startup Nikola (-1.31%) and biotech firm with a coronavirus vaccine underway, Novavax (+2.41%) 
 
If individual investors are affecting prices, then it’s for the most speculative stocks and if that sounds like a casino, that’s because it is. 
 
Contrast that to Asia, where stock markets have long been seen like just another casino venue. 
 
With a far less developed mutual fund industry, a tech-savvy population accustomed to trading on smartphones and commissions which have often tended towards zero, amidst fierce industry competition, retail investors drive over 80% of volume on Asian markets such as China and South Korea. 
 
The U.S. may just be catching up, especially given that many casinos and sports betting venues had been closed during the coronavirus pandemic lockdown. 
 
And that has meant a brisk business for electronic traders in the U.S. who process these retail trades, including Virtu Financial (+4.74%), which combined with privately-held Citadel Securities and Susquehanna International Group, traded a combined 69.4 billion shares over the counter in June, over triple their level in November, according to Bloomberg Intelligence. 
 
Electronic trading firms profit from retail trades by collecting a small difference between the buying and selling price of a stock, known as the “spread.” 
 
Virtu Financial has seen its net trading income more than triple to US$744 million in the second quarter and its stock is up some 56% since the start of this year, and this could just be the beginning. 
 
With retail investor behavior, especially since the coronavirus pandemic has made stockbrokers of us all, likely to be “sticky,” when there’s a gold rush, the best thing to do is to sell pick axes and shovels, which is precisely what firms like Virtu Financial are doing. 
 
And as for that airline stock? Don’t, just don’t. 

2. Banking on Bonds May Be Hazardous to Portfolio Health

  • Near-zero treasury yield is putting pressure on portfolio’s long-term performance which is forcing investors to consider allocations into higher-yielding corporate debt 
  • Swapping out equity risk for credit risk may make sense as rates look likely to stay low for awhile longer 
Investing used to be a whole lot simpler, with a simple blend of 80/20 stocks and bonds for younger investors segueing into a 60/40 split for mid-career individuals, and then riding out 20/80 in retirement for a regular income stream. 
 
But even before the 2008 financial crisis, decades of low interest rates had seen the allure of government bonds, in particular U.S. Treasuries, fade, and the coronavirus pandemic may well be the final nail in the coffin. 
 
As the coupon on the benchmark 10-year U.S. Treasury edges ever-closer to zero, investors may be forced to consider high-yield corporate bonds and even emerging-market debt, to eke out performance similar to what their forebears may have enjoyed. 
 
In the past, bad times were a payday for those holding safe U.S. Treasuries, but that payoff is no longer there, which is why investors are needing to rout between the couch cushions in the hunt for yield. 
 
With the U.S. Federal Reserve indicating that rates are likely to remain depressed for as long as it takes, it may just make sense to take on more credit risk in return for higher yield – especially if that yield comes with an implied Fed backstop. 
 
And that means investors will need to critically assess not only what their fixed income portfolios can realistically achieve moving forward, but also what the implications are for the amount of risk that they can afford to take across the rest of their portfolio.
 
In which case, it may even make sense to dial back on equities (because there may be a potential bubble) and assign some of that equity allocation into corporate bonds. 
 
Because unprecedented times call for unprecedented strategies, that which may seem least safe, may turn out to be the safest of all. 

3. Bitcoin May Be Poised To Test US$12,000 Again

  • Exchange flow activity and key technical indicators suggest that another test of US$12,000 likely in the coming days 
  • Institutional interest in the cryptocurrency space, including JPMorgan Chase (-2.51%) (a once famous critic of Bitcoin) investing in ConsenSys (a blockchain company closely associated with the development of Ethereum) as well as Fidelity Investments’ new Bitcoin fund, adding to bullish Bitcoin news 
The bamboo tree takes five years to grow, and for the first four years of its growth, the ground has to watered and fertilized, without even a hint of a bamboo shoot. 
 
But in the fifth year, that bamboo tree breaks through the ground and when it breaks through the ground, within five weeks, it grows 90 feet (27 meters).
 
So the question is, does the bamboo tree take 5 years to grow 90 feet, or 5 weeks?  
 
The answer is obvious, the bamboo tree takes 5 years to grow 90 feet. 
 
Because at any time, if you stop watering or fertilizing that ground where that bamboo tree should grow, that bamboo tree would have died in the ground. 
 
Yet for four years, despite all that work, there may be nothing to show for it, until of course the fifth year. 
 
And that must be what it feels like sometimes for Bitcoin bulls. 
 
After weeks of muted trading, Bitcoin may be just about to emerge from the ground, at least according to technical indicators. 
 
Over the weekend, Bitcoin showed strong resilience off the lower trading envelope band, a move that suggests it’s likely to retest US$12,000 in the coming days, with exchange outflows marking an inflection point that suggest investors are holding onto their Bitcoin in anticipation of price appreciation. 
 
There are other signs as well, particularly the GTI Global Strength Indicator which suggests that Bitcoin has entered a new round of buying and isn’t in overbought territory. 
 
That combined with the outflows from cryptocurrency exchanges suggests that Bitcoin could be set for further gains. 
 
With plenty of macro factors such as the Fed keeping interest rates low and unprecedented monetary stimulus from central banks feeding into the Bitcoin narrative, and increasing institutional interest in the cryptocurrency sector,  Bitcoin bulls may just see their bamboo blossom. 

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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