Note to Market Slice Readers:
This issue marks the one-year anniversary of Market Slice. We published issue #1 on July 5, 2021, and since then we’ve seen a bumpy ride to the top of the stock market and the subsequent slide down, a long bull run in commodities, and a stunning crash in the crypto markets.
Readers have told us they appreciate the insights they get from Market Slice’s macro analysis. While this is not a “trade alert” newsletter, many of the ideas we’ve shared – from going long on the VIX when it was below 20, to buying oil at 75, to fading market expectations in the current downturn – have been useful to traders looking for a “big picture” orientation to today’s crazy markets.
That’s why FFR Trading is pleased to announce a new concierge service designed to provide you with a higher level of analysis and service. In the next few weeks, we will provide additional details. In the meantime if you want to get on the waitlist, or sign up for future announcements call Market Slice Managing Editor Chris Davis at (737) 292-4425.
Bear Market Grinds Lower
We’ve shared this chart a few times in recent months. This is an overlay of this year’s bear market with the 2002 dotcom bubble crash.
As you can see, the 2022 decline has closely paralleled the 2002 crash, until recently. The bear market rally that began in mid-June has slowed the pace of this year’s selloff, but with a continuing pattern of lower highs and lower lows, the trajectory remains downward.
This chart shows the extremity of the downside move in the NASDAQ. The purple line represents the 100-day moving average:
Market Ear comments,
We have seen tech bears before, but haven’t seen this in a long time. As Bear Traps notes: “The Nasdaq has been below its 100-day moving average for 6 months – the longest stretch since Lehman”…and things aren’t really pointing up at the moment.
What this shows us is that hopes for a speedy end to this bear market are probably futile. One more chart makes the point, this one from the 5 Minute Forecast. The solid while line is this year’s bear market; all the other lines represent past bears. While this one has not been the most severe, the likely trajectory of the market in 2022 can be extrapolated from this data.
The argument for an extended downturn is strong. Considering the issues we’ve been talking about all year – inflation, rising interest rates, economic slowdown, supply chain problems, food and energy shortages, and geopolitical crisis – remain unresolved, there is little reason to expect a swift turnaround.
With that said, however, our contrarian nature inclines us to believe that, barring an unexpected “black swan,” the next leg down is not immanent. With the Fear and Greed Index still in “Extreme Fear,” we tend to expect the short-term direction is, if not up, at least sideways.
Calling Dr. Copper
Two weeks ago we wrote the recession of 2022 has already begun; now we are seeing strong confirmations from the commodities markets. This chart shows the Bloomberg Agriculture Index of agricultural commodities. As you can see, there has been a sharp break downward in the past few weeks.
This decline is another confirmation that we are moving into a significant economic slowdown. While it does not yet mark a reversal of the commodity “super bull” cycle we’ve been talking about for months (and actually all the way back to September of last year), it is a warning signal to short-term traders still looking for a strong upside move in one or more markets.
Take a look at these headlines from Tuesday’s news:
- Double Digit Drops For Tuesday Wheat
- Cotton Closes Limit Lower
- Cattle Fall Triple Digits
- Hard Losses in Tuesday Soy Market
Not a pretty picture. Then there’s Copper, long referred to as “Dr. Copper” because of its predictive role in anticipating developments in the economy.
Simply put, copper has fallen off the table. After briefly touching 5 cents a pound in March, it’s now down to 3.38. As a forward indicator of economic activity, the price of copper is signaling a deepening slowdown, which is now being confirmed in commodity markets around the globe. This is just another confirmation of our thesis that an extended recession is already at hand.
Smart traders understand that it’s possible to make money in declining markets as well – or even better—than when they’re going up. With sudden moves to the downside happening frequently now, FFR Trading clients are seeing outstanding gains on the short side. We recently notified clients about a successful short lumber trade that made an astounding $23,496 on a single contract! Skeptical? Here’s the brokerage statement to prove it!
Even though Market Slice doesn’t really cover cryptocurrencies, it would be a glaring omission if we failed to comment on the expanding contagion in these markets.
This chart shows the total cryptocurrency market cap, going back to 2019. The horizontal line is at $950 billion. This arbitrary marker was passed on the way up in January of 2021, and, after nearly 18 months, broken to the downside on June 13 of this year.
While the crypto market remains above the levels it saw prior to 2021, this year’s retreat represents a loss of nearly $2 trillion in market cap…a nearly 70% decline (33% in June alone). Since so many retail investors jumped into the crypto space in 2021, the average cost basis (the price paid upon entry) for many crypto holders is above the current price. In other words, millions of traders are now upside down, in losing positions. This has led to increasing liquidations, as nervous investors crowd the exits. As a result, a few key exchanges have been forced to pause withdrawals, which of course further undermines confidence throughout the sector, leading to more withdrawals, downward pressure on prices, and solvency issues for the companies involved.
As crypto skeptics crow “I told you so” and HODL’ers find out what holding on for dear life really means, traders and investors are faced with some uncomfortable choices. On the one hand, this could represent a second chance to get into instruments like Bitcoin at “reasonable” prices (relative to previous highs.) On the other, with confidence in crypto currencies at a cycle low, there is a lot of fear that things could go even further south…maybe a lot further. Some prudent voices are suggesting that this could be a time to look for value in the stock prices of companies in this sector. With prices being beaten down by the crypto slump, there are opportunities to find solid, well-run businesses – many with significant cash on hand from selling Bitcoin and other cryptos earlier in the cycle – that are now undervalued by traditional measures.
Even with cryptocurrency prices in the tank, you can find companies with low P/E ratios and high book value at a discount due to market conditions. Buying out-of-favor companies with solid fundamentals – the essence of value investing, as popularized by Benjamin Graham and Warren Buffet, among others – might be one way to profit from the current “frightened bear” in cryptocurrencies.
Have You Been Flattened by These Markets?
You are not alone. These are difficult times for investors looking to secure their future and enjoy above-market returns. When you join FFR’s Concierge program, you’ll gain every advantage when it comes to trading the markets, with the balanced, unbiased view you’ve come to expect from Market Slice. Sign up to receive the early bird announcement… and avoid the next “dip in the road.”