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Novum Alpha - Weekend Edition 14-15 August 2021 (10-Minute Read)

The saying "sell in May and go away" couldn't have proved to be more accurate as investors review the market of the past few months. Lifting travel restrictions and the easing of pandemic curbs in many parts of the world have seen many traders and money managers take some well-deserved time off and that's been reflected in flagging volumes. 

A wonderful weekend to you as U.S. equities surged to fresh records while Asian stocks were a mixed bag as China's continuing crackdown weighed on sentiment. 

In brief (TL:DR)

  • U.S. stocks inched up on Friday with the Dow Jones Industrial Average (+0.04%), S&P 500 (+0.16%) and tech-centric Nasdaq Composite (+0.04%) all marginally higher after trading within a narrow range for most of the session. 
  • Asian stocks closed mostly lower on Friday as concerns over the delta variant and China’s regulatory curbs weighed heavily on sentiment.
  • Benchmark U.S. 10-year Treasuries slipped to 1.286% (yields fall when bond prices rise) on concerns over the economic recovery and the delta variant. 
  • The dollar was steady. 
  • Oil slipped with September 2021 contracts for WTI Crude Oil (Nymex) (-0.94%) at US$68.44 as traders considered the slowing economic recovery at a time when suppliers are intending to open the taps. 
  • Gold recovered with December 2021 contracts for Gold (Comex) (+1.51%) at US$1,778.20, on a bout of increasing uncertainty, despite bullishness for equities on Wall Street. 
  • Bitcoin (+5.85%) rallied to US$47,559 heading into the weekend, clearing a key technical level of resistance over US$46,000, with inflows slowing against outflows (outflows suggest that investors are looking to hold Bitcoin in anticipation of higher prices). 

In today's issue...

  1. When Should Investors Go All-In? 
  2. Robinhood - The Meme Stock to Rule Them All
  3. Bitcoin's Unleveraged Bull Run



Market Overview

The saying "sell in May and go away" couldn't have proved to be more accurate as investors review the market of the past few months. 
Lifting travel restrictions and the easing of pandemic curbs in many parts of the world have seen many traders and money managers take some well-deserved time off and that's been reflected in flagging volumes. 
Just under 3.4 billion shares changed hands on the New York Stock Exchange on Thursday last week, well below the average daily volume for the year of almost 4.7 billion and that means any movement up or down, is less indicative of the general market sentiment - nobody's around to express much by way of sentiment. 
In Asia, traders missed out on the Wall Street rally as continued concern over the delta variant coupled with what looks like a long and painful crackdown by Beijing saw shares sink, with Tokyo's Nikkei 225 (-0.14%)Seoul's Kospi Index (-1.16%) and Hong Kong's Hang Seng (-0.48%) all lower while and Sydney’s ASX 200 (+0.54%) was higher, shrugging Asian malaise. 

Did you miss us at the Super Crypto Conference 2021? Watch it here...


1. When Should Investors Go All-In?

  • Diversification provides average gains for investors, which can lead to bouts of impatience, impertinence and impulsiveness, undermining the very reason to keep a diversified portfolio 
  • Investors need to stick to a plan either way, commit to concentration but be prepared to put in the work, or diversify and accept either average to below average levels of return 
Oftentimes doing what the experts suggest is good for us isn’t very much fun at all – whether it’s exercising daily, or avoiding junk food, what’s apparently bad for you can sometimes just feel so good.
And nowhere is this more apparent than in investing.
Almost everyone knows a story (some personally) of someone who struck it rich on that one investment, mortgaging their home to go all in on that one bet, whether it was cryptocurrencies or a startup.
And increasingly, more investors, in particular retail, are looking to grow their money to the moon, as the idea of growing money gradually, but reliably, with a diversified portfolio has become increasingly passe.
Billionaire investor Mark Cuban kicked off the trend a decade ago when he declared that “diversification is for idiots.”
From Bitcoin to Tesla (-0.70%), highflying investments have reinforced the message that the key to riches beyond the dreams of avarice is in making big, concentrated bets, provided of course, you know what you’re doing.
Legendary value investor Warren Buffett, who few would characterize as a gambler, has spoken often about the virtues of holding concentrated positions,
“Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.”
Hardly anyone has the time to keep on top of dozens of companies within a portfolio, let alone the mindboggling array of investment options that are increasingly available to retail investors, from crowdfunding to cryptocurrencies. 
And while many analysts and financial writers preach the value of index investing, which is why they have become so hot in the past decade – just buy the whole market and be happy with being average – that assumes an investor is content with an average return and an average life.
But if investors aren’t, that’s when diversification can actually be damaging and set them up for a big loss down the road.
Consider the diversified investor who earns a respectable 8% per annum on their highly diversified portfolio – even in a massive bull run, they can expect to return around 15%, because not all securities will rally at the same rate, and some might even fall.
But the investor who concentrated all their bets on that one stock or that one sector could have seen a return of 80% or as much as 10 times the highly-diversified investor.
While one investor is tooling around in his Toyota Camry, the other is taking off in his Tesla Model S.
Dissatisfied, that he’s missing out on opportunities, the “patient” indexer, in a moment of weakness decides to go all-in on a “hot” stock tip or investment scheme and loses it all.
The key ultimately isn’t diversification or concentration, the key is knowledge.
Diversification is the right tool for those who can’t, or won’t be invested intellectually in their investments, while those who can, or will, receive the fruits of their labor in the long run.
While the biggest argument for diversification is protection from risk, by buying a multitude of stocks, a diversified portfolio is still not protected from overall market risk when the market tumbles.
Investing is hard work and an ongoing study, diversification or concentration notwithstanding. 

Did you miss us at the Super Crypto Conference 2021? Watch it here...


2. Robinhood - The Meme Stock to Rule Them All

  • Robinhood Markets (+5.26%) surges 100% only to correct by almost 50% over the past two weeks 
  • Retail trading app has plenty of room to continue rallying harder, given that meme stocks tend to be driven strongly by sentiment and options activity suggest another push to US$70 
When 23-year-old Brian Stuart took up his IPO allocation of Robinhood Markets, he was convinced that it would surge by at least 30% at the open.
Instead, the trading app that made meme stocks like GameStop (+0.10%) and AMC Entertainment (+1.21%) household names, flopped on its debut, closing down by around 8.4%, the worst large IPO opening ever according to data from Bloomberg.
But Stuart didn’t waver, instead of dumping his Robinhood stock in a panic, he held onto it using so-called diamond hands (investors who won’t sell a security regardless of the circumstances) and was richly rewarded for it.
The same ingredients that boosted the fortunes of other meme stocks, has helped Robinhood Markets surge by 100% two weeks ago, only to shed another 50% in the past week, mimicking the sudden rebound and volatile rally in Reddit darlings that have gripped Wall Street this past year.
Stuart sold some of his Robinhood shares, “profit-taking” he calls it, but many others that form the core of Robinhood’s customer demographic did not, stocking up on bullish call options (the right to buy) instead.
As meme stocks go, the rally and pullback in Robinhood Markets is just table stakes.
Rallying to around US$70 a week earlier, Robinhood closed around US$50 last week, up from its IPO price of US$38, but still well off its all-time-high.
Volatility in Robinhood’s public debut was almost a given, with as much as 35% of shares in its IPO being offered to retail investors, who ultimately took up only around 25%. 
Some have suggested that the lackluster showing was a result of Robinhood’s move to halt trading of some of the hottest meme stocks earlier this year, buckling to pressure from its corporate investors and raising the ire of retail investors who felt "cheated" by the platform. 
Nonetheless, bullish call options with a strike price of US$70 and that are due to expire on August 20 could still see another sharp rally, as market makers move to cover their positions and retail traders bid up the stock of the company.
There’s little doubt that Robinhood is trading mainly on sentiment, and there are naysayers and believers on both sides, with options accentuating the violence of those swings.
But as meme stocks go, this meme hasn't fizzled out just yet.

3. Bitcoin's Unleveraged Bull Run

  • Bitcoin's most recent rally not driven by leverage 
  • Lack of leverage in Bitcoin's recent rally could suggest that investors don't have strong expectations of a sustained push over US$46,000 or could be a function of a pullback in leverage options and traders still nursing losses from May's unwinding of margin 
As Bitcoin goes, even the most diamond of hands can turn to paper in the face of leverage.
In two bouts of extreme volatility in May and June, traders who had placed highly-leveraged bullish bets on Bitcoin’s relentless ascent were whipsawed and stopped out by a sudden selloff that rippled through the cryptosphere and caused a cascade of liquidations.
Those episodes saw Bitcoin plunge to as low as US$28,000, from a high of around US$64,000 in April.
But as greater regulatory pressure has been brought to bear on the cryptocurrency space, exchanges like Binance and FTX have voluntarily started to dial back on the leverage that they are willing to make available to traders, bringing juiced up bets to just 20 times.   
Binance has even gone as far as to shutter its lucrative cryptocurrency operation in Europe, which at one point was a magnet for traders wanting to bet big on cryptocurrency price swings with copious amounts of leverage.
Given how many of the world’s biggest cryptocurrency exchanges by trading volume are unregulated, some made leverage as high as 100 times available on their platforms, but a regulatory dragnet has put pressure on them to curb the appetite of traders’ most excessive speculative urges.  
And as Bitcoin rallied last month, one thing was noticeably absent from the mix – leverage, with the spread between Bitcoin futures and spot prices shrinking to its lowest levels relative to February’s speculative surge.
Investors are betting on Bitcoin, but they’ve shunned the leveraged long positions that have helped fuel previous rallies, suggesting that they either don’t believe the recent push over US$46,000 is a genuine breakthrough, or the leverage is yet to come.
Over the past several weeks, Bitcoin has been steadily climbing higher, breaking key technical barriers that some have suggested could precipitate a further rally.
But whether that leverage will come is another story altogether.
Many traders are still nursing losses from having their accounts liquidated in May, with an estimated US$8.6 billion evaporated from margin calls and exchanges forcibly wiping out leveraged positions. 
But if that leverage should come, a highly speculative push to 6-digit Bitcoin is a possibility. 

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Aug 14, 2021

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