Doc's Daily Commentary

Mind Of Mav

Why The Market Sold Off Today

 

Today, everything under the sun sold off. 

No, it wasn’t quite as bloody or panic-driven as the market in March of 2020, but it certainly sent some into crisis mode.

So, let’s break down what happened, why it happened, and what to do about it.

The Dip Explained

Market corrections are nothing new.

Everyone knew that it would be any day now that the correction would start — the market simply became too greedy too fast.

It’s likely that all stocks & the crypto market will fall this week, but just like Cathy Wood said, this isn’t anything to worry about in the long term. The world is about to change in drastic ways and tech investments will be the winning bet. If you need proof just look at how it’s shaped society and the systems that run it.

Tech will govern our world and we’re getting close to that reality.

Not all tech will go up . . . but, like the dotcom bubble and crash, a lot of companies were weeded out and if you’ve done your DD and know your picks then these bloody days ahead are no sweat. Nothing goes down quicker in a bear market than stocks with a forward-looking overvalued PE. (Tech Stocks).

They will also be the first stocks to recover massively because they will be oversold — again because our future is in tech.

Look for tech with sound fundamentals and a growing market. There will be some bargains picked up next month.

 

Why Bonds Cause Stocks To Sell-Off

We have to remember that this is more than mean reversion – rising yields will always take down growth stocks.
 
Bonds are always being sold just like stocks are.
 
Stocks have the stock market, bonds have the bond market. Yields are going up because the expectation of inflation is going up. If you are buying debt, and inflation is rising faster than the interest rate, then you’re essentially paying the borrower for access to your money. So bond buyers are demanding higher interest rates right now, causing yields to increase as well.
 
Then, your super safe index investor begins to look at historically high bond yields compared to SPY and its risks, and decides to invest in bond indexes. This outflow causes SPY and its components to go lower. Someone that was invested in TSLA will look at how low SPY is and its relative security, and invest in that. This will lower the price of TSLA, making it attractive to the CCIV holder, etc. The whole thing is a feedback loop because this shift into bonds really does make stocks go down, and at the same time feel riskier, causing people to buy “safe” bonds. This continues until inflation or interest rates go down, stocks go back up, or bonds become overbought, at which point the whole dance happens in reverse.
 
Aaaaaand then everyone realizes inflation is going no-where fast and bond returns are still bad and piles back into stocks. Has happened a hundred times over and will happen a hundred times again.
 
The velocity of money is still super low, so we won’t see inflation numbers rise anytime soon. Jerome Powell (Fed Chair) just confirmed this today: https://www.cnbc.com/2021/02/23/powell-says-inflation-is-still-soft-and-the-fed-is-committed-to-current-policy-stance.html
 
I only could see inflation rates going up happening if, for some reason, there was no more production capacity and/or significant lack of commodities.
 
Neither scenario is likely going to happen. Energy is plentiful in all forms, factories are not even close to being at full capacity, capital is ready to be deployed.
 
This too shall pass.
 
 

The Fed Put

Normally, we’d be entering a real corrective period right now (think 2008-2009), but the game has changed.

This is the essence of the “Fed Put” or “Greenspan Put”, i.e., Stocks are not allowed to go down. (https://www.investopedia.com/terms/g/greenspanput.asp)

Every time over the last year we’ve seen stocks start to slide, suddenly there’s trillions of magic money fired out of the fiscal bazooka.

Already we’re seeing prep work being made for Stimulus 3.0 (https://csbcorrespondent.com/market-commentary/market-update/february-22-2021). The virus curve will flatten with warmer weather and increased herd immunity. The Biden Administration, having just taken over, has every inventive to keep the unemployment numbers low so they’ll keep pounding more cheap money into the economy and encouraging “jobs jobs jobs” so they look better than the Trump admin on paper, even if the economy is actually in worse shape.

This is a K-shaped recovery turning into a K-shaped economy.

 

Jerome Powell’s Comments Today

I read some takes on his comments as it being a “nothing burger”. I disagree with that.

“We will continue large scale asset purchases even though the outlook is improving”, i.e., Powell’s super important quote of the day.

Basically, he said, “we won’t let stocks go down.”

This is because The Fed revised its approach last year to inflation. In the past, it would levy preventive rate hikes when it saw unemployment drop, thinking that a stronger job market would push up prices. Now, it has adopted an approach in which it will allow inflation to average above 2% for a period of time before moving to tighten policy.

Essentially, their new approach is: Unemployment Numbers > Inflation %

What I found to also be the case is that Powell’s comments were a pretty seismic shift in terms of labor market targeting, too:

Regarding our employment goal, we emphasize that maximum employment is a broad and inclusive goal. This change reflects our appreciation for the benefits of a strong labor market, particularly for low- and moderate-income communities. In addition, we state that our policy decisions will be informed by our “assessments of shortfalls of employment from its maximum level” rather than by “deviations from its maximum level.” This change means that we will not tighten monetary policy solely in response to a strong labor market

Interestingly enough FFR futures are generally quite efficient in their pricing over the short term, indicating Fed communication is quite effective in telegraphing intent. https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr491.pdf

What To Look For In A Down Market

That’s a long-winded response to say that the problem (and why we see days like today) is that a lot of tech stocks were (and are) priced like it’s the year 2035 of the technology revolution, so there’s zero room for error or sentiment shift. DESPITE THAT, it’s still in your best interest to invest in the future of technology, specifically fintech. Look at the stocks getting added to the ARK Fintech Innovation ETF (ARKF) and you’ll absolutely crush it.
 
When we see the sentiment pendulum swing back towards favoring stocks / tech / speculative assets like crypto, we’ll see ETH $4k and BTC $100k

This is the outcome of the cheap capital environment where bonds are dead and risk is rewarded.

So . . . buy the dip, right?

Well, how do you do that? In fact, where should you be looking overall?

I look at all the “bubbles” that are forming right now, and when they “pop” (or at least deflate a bit), I use their industries to determine which would be most lucrative. If we go off what ARK Invest and Cathy Wood are into (see https://research.ark-invest.com/hubfs/1_Download_Files_ARK-Invest/White_Papers/ARK%E2%80%93Invest_BigIdeas_2021.pdf) then it would look something like this:

 

EV -> Auto manufacturers -> Consumer cyclical

Fintech -> Financial Services -> Financials

Marijuana -> similar to Tobacco -> Consumer Defensive

Genomics -> biotech -> Healthcare

From the most profitable to least profitable out of the above sectors, we have:

 

Financials

Healthcare

Consumer Cyclical

Consumer Defensive

Therefore, I would expect ‘fintech’ to become the most profitable, then ‘genomics’ then ‘EVs’ then ‘weed’, at least loosely speaking.

 
 

The ReadySetCrypto "Three Token Pillars" Community Portfolio (V3)

 

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The “Three Token Pillars” portfolio is democratically proportioned between the Three Pillars of the Token Economy & Interchain:

CryptoCurreny – Security Tokens (STO) – Decentralized Finance (DeFi)

With this portfolio, we will identify and take advantage of the opportunities within the Three
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The Second Phase of the RSC Community Portfolio V3 was to give us a general idea of the weightings people desire in each of the three pillars and also member’s risk tolerance. The Third Phase of the RSC Community Portfolio V3 has us closing in on a finalized portfolio allocation before we consolidated onto the highest quality projects.

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The ReadySetCrypto "Top Ten Crypto" Community Portfolio (V4)

 

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What is the goal of this portfolio? 

The “Top Ten Crypto” portfolio is a democratically proportioned portfolio balanced based on votes from members of the RSC community as to what they believe are the top 10 projects by potential.
 
This portfolio should be much more useful given the ever-changing market dynamics. In short, you rank the projects you believe deserve a spot in the top 10. It should represent a portfolio and rank that you believe will stand the test of time. Once we have a good cross-section, we can study and make an assessment as to where we see value and perhaps where some diamonds in the rough opportunities exist. In a perfect world, we will end up with a Pareto-style distribution that describes the largest value capture in the market.
 
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SoV/money == BTC, DCR
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Private Money == XMR / ZEC / ZEN
DeFi == MKR / SNX and stablecoins
 
It is the most realistic way for us to distill the entirety of what we have learned (and that includes the RSC community opinion). We have an array of articles that have gradually picked off one by one different projects, some of which end up being many thousands of words to come to this conclusion. It is not capitulation because we all remain in the market. It is simply a consolidation of quality. We seek the cream of the crop as the milk turns sour on aggregate.

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