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Novum Alpha - Daily Analysis 19 November 2021 (10-Minute Read)

A fantastic Friday to you as stocks fudge their way through fiscal stimulus, inflation and a resurgent pandemic.

 

In brief (TL:DR)

 
  • U.S. stocks were mixed on Thursday with the Dow Jones Industrial Average (-0.17%) down, while S&P 500 (+0.34%) and tech-centric Nasdaq Composite (+0.45%) were up.
  • Asian stocks were mixed Friday amid a drop in Chinese technology stocks.
  • Benchmark U.S. 10-year Treasury yields were little changed at 1.59% (yields fall when bond prices rise). 
  • The dollar was steady as traders evaluated the risk of faster monetary tightening to fight high inflation.
  • Oil edged up with December 2021 contracts for WTI Crude Oil (Nymex) (+0.24%) at US$79.20 as the wait continues to see if the U.S. will join China in tapping strategic reserves.
  • Gold was higher with February 2022 contracts for Gold (Comex) (+0.09%) at US$1,865.70. 
  • Bitcoin (-6.89%) extended a slide, dropping to US$55,876 in Asian trading on Friday on continuing concerns against a backdrop of bearish news, including the prospect of onerous U.S. tax declarations for cryptocurrencies, the rejection of a VanEck spot-based bitcoin ETF and continuing regulatory crackdown in China. 

 

In today's issue...

 
  1. Wall Street Cares What Main Street Traders Think
  2. Japan Continues to Stimulate Economy
  3. Bitcoin Continues Its Slide But Becomes Increasingly Uncorrelated
 

Market Overview

 
Global stocks continue to hover near records, propped up by corporate earnings growth, particularly in the U.S. Such company performance has helped to cushion concerns that price pressures will hamper the economic recovery from the pandemic in part by forcing faster interest-rate hikes.
 
Elsewhere, China Beige Book International Chief Executive Officer Leland Miller, speaking on the sidelines of the Bloomberg New Economy Forum in Singapore, warned that China’s economy is slowing more than people think.
 
In Asia, markets were mixed Friday with Hong Kong's Hang Seng (-1.81%) down, while Tokyo's Nikkei 225 (+0.48%), Sydney’s ASX 200 (+0.20%) and Seoul's Kospi Index (+0.45%) were up in the morning trading session.
 
 

1. Wall Street Cares What Main Street Traders Think

 
  • Yesterday, S&P Dow Jones Indices said it was launching gauges that would measure daily sentiment on Twitter in a bid to garner insights on what “everyone” is thinking.
  • The S&P 500 Twitter Sentiment Index will measure the performance of the 200 constituent stocks with the highest sentiment scores and will be float-adjusted
 
With the sting of the meme stock short squeeze still fresh in the minds of Wall Street, it would make sense that the so-called “smart money” is keen to avoid a repeat of that episode by gleaning insights to the psyche of retail day traders.
 
Yesterday, S&P Dow Jones Indices said it was launching gauges that would measure daily sentiment on Twitter in a bid to garner insights on what “everyone” is thinking.
 
Two new indices will be based on analyses of tweets that contain “$cashtags” which Twitter uses to deploy to reference stock symbols.
 
The S&P 500 Twitter Sentiment Index will measure the performance of the 200 constituent stocks with the highest sentiment scores and will be float-adjusted.
 
Another index, the S&P 500 Twitter Sentiment Select Equal Weight Index will measure the performance of 50 stocks on a more equal basis, with rebalancing at the beginning of each month.
 
As valuations have soared alongside loose monetary policy and fiscal stimulus, traditional metrics to price the stock of companies have looked increasingly out of touch with the broader market.
 
Although the European Central Bank warned earlier this week of “exuberance,” professional traders are not discounting the growing influence of sentiment on equity prices.
 
Companies like Hertz Global Holdings (-6.91%), AMC Entertainment (-4.08%) and GameStop (+0.057%) have all been given a second lease of life because of the flood of retail traders which have boosted their share prices beyond any traditional valuation metric.
 
The pandemic as well as easy-to-use retail trading apps like those of Robinhood Market (-7.15%), which pioneered zero-fee trading and the gamification of investment, have also created durable trends in U.S. markets, where previously institutional investors were responsible for the bulk of flows.
 
For as long as liquidity conditions continue to remain loose, traders ignore sentiment at their own peril.
 
 

2. Japan Continues to Stimulate Economy

 
  • Japan, the world’s third largest economy, is looking to add to that spending with another US$350 billion package.
  • The major concern for more spending in Japan is that the country is already nursing a mountain of debt borne out of the property crisis of the 1990s and which has since reached 266% of GDP.
     
Even as the world’s major economies start contemplating the dialing back of fiscal and monetary stimulus, Japan, the world’s third largest economy, is looking to unleash even more measures on its own economy.
 
Unlike the U.S. and Europe, Japan, which has already spent some US$770 billion in fiscal stimulus, or around 17% of GDP since the start of the pandemic, is looking to add to that spending with another US$350 billion package.
 
The measure would include a direct cash distribution of around US$872 to Japanese households with children younger than 18, as part of a huge spending package to be unveiled today.
 
Japan is desperate to spur more domestic consumption, with inflation forecasts barely at 1% for the middle of next year, but past stimulus checks ended up in savings account and there are few signs this time will be any different.
 
The major concern for more spending in Japan is that the country is already nursing a mountain of debt borne out of the property crisis of the 1990s and which has since reached 266% of GDP.
 
During the last stimulus check exercise in Japan, an estimated 70% of the US$872 checks ended up in bank accounts to boost savings.
 
Unlike other advanced nations, Japan has seen a far slower economic recovery from the pandemic, with the economy contracting at an annualized rate of 3% in the third quarter owing to global supply chain disruptions which have dented key export industries.
 
Nonetheless, economists predict a robust rebound in the final months of this year for Japan, due in large part to the lifting of pandemic restrictions, higher vaccination rates and a steep decline in the number of infections.
 

Find out more about Novum Alpha as leading luxury portal Luxuo.com interviews our CEO & General Counsel, Patrick Tan...

 

 

 

3. Bitcoin Continues Its Slide But Becomes Increasingly Uncorrelated

 
  • Most seasoned cryptocurrency traders will probably not blink at the volatility, with bitcoin having shed just 15% from its all time high closer to US$69,000 this month, the losses are table stakes for most.
  • Nonetheless, some observers suggest that so long as bitcoin remains above US$50,000, there is little to be overly concerned about.
 
Slipping below US$57,000 for the first time since October, benchmark cryptocurrency bitcoin continues to retreat from record highs.
 
Bitcoin hasn’t slumped this long since the five days that ended May 16 with some traders suggesting that the primary cause is the unwinding of overly bullish, leveraged positions that assumed the cryptocurrency could only really travel in one direction.
 
Most seasoned cryptocurrency traders will probably not blink at the volatility, with bitcoin having shed just 15% from its all time high closer to US$69,000 this month, the losses are table stakes for most.
 
Analysts are supplying a variety of reasons for the bitcoin selloff, from an alleged regulatory crackdown in China as well as an overheated rally that got ahead of itself.
 
Technical analysts, who review bitcoin charts to discern signals for where the cryptocurrency could head next, have noted that bitcoin has dipped below its 50-day moving average, and if it continues to fall further, may even touch US$54,500, an important level of support.
 
Nonetheless, some observers suggest that so long as bitcoin remains above US$50,000, there is little to be overly concerned about.
 
Ether traders however had a (relatively) easier time, with the cryptocurrency managing to rebound of its own 50-day moving average, thanks in large part to the announcement by the iconic Time magazine that it would be holding ether as part of a deal with Galaxy Digital.
 
Given that sentiment, a key determinant of prices in the volatile cryptocurrency sector, remains bullish, the most recent pullback, while sharp, does not seem to be indicative of capitulation, nor is it likely to be the precursor to another fresh cryptocurrency winter.
 
To be sure, the major central banks like the U.S. Federal Reserve and the European Central Bank have all indicated that they intend to continue keeping interest rates at their current levels for some time more and that will continue to provide the fuel for speculation on a variety of assets, not just cryptocurrencies.
 
As cryptocurrencies head into the weekend, it appears as if bitcoin and ether are reaching short-term oversold positions, which may see a rebound, against a backdrop of lower trading volumes, which typically mark the weekend.
 
For investors who hold bitcoin as a portfolio diversification tool however, the good news is that the cryptocurrency and Nasdaq 100 futures, is showing an increasing lack of correlation.
 
Most financial advisers recommend no more than a 5% allocation of a portfolio into bitcoin or cryptocurrencies, and given the far stronger correlation between cryptocurrencies and tech stocks in earlier periods, the recent divergence will raise questions about its role as a diversification tool for investors. 
 
The 30-day correlation between bitcoin and Nasdaq 100 futures fell to near zero in recent days, from a peak of 0.56 towards the end of September – a correlation of 1 means the two assets are perfectly correlated and -1 means they are perfectly uncorrelated.
 
Since February 2020, the correlation between bitcoin and tech stocks measured by Nasdaq 100 futures has generally been positive, but bitcoin’s 40% rise since the end of September topped the Nasdaq 100’s 11% rise.
 
As a nascent asset class, bitcoin has not shown any consistent correlations with other asset classes, with correlations swinging from positive to negative at a drop of a hat, which is why investors looking to use the cryptocurrency as a portfolio diversification tool need to take a far longer view – short-term changes in correlation in and of themselves ought not be seen as representative.
 
 

What can Digital Assets do for you?

 
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With almost a decade trading both digital assets and financial instruments, the Fund represents a blend of our best quantitative strategies melded with a discretionary overlay that provides investors with the most comprehensive and holistic approach to digital assets on the market today. 
 
If this is something of interest to you, or if you'd like to know how digital assets can fundamentally improve your portfolio, please feel free to reach out to me by clicking here.  

Nov 19, 2021

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