It has been a while since my last update, mostly because the crypto market has been indecisive and non-trending. The question whether this deep correction indeed is the beginning of a bear-market remains. Technically, there are no news. The algorithms do all suggest short, but we have been trading sideways. I should reiterate that such environment is awful for trend following algorithms – mine included.
I still believe this is a deep mid-cycle correction comparable to the April 2013 one. Prior to the correction, we saw massive bullishness and a very steep rise in price, very comparable to the first half of the 2013 bull market. The 2013 correction made a total draw down of about 80 % and it took 210 days to reclaim the all-time high. Most of the trading were in a sideways channel, precluding most trend following traders from making any money at all.
The correction we have had thus far follow a somewhat similar pattern, but less brutal. Please remember that Bitcoin is up 668 % since the Covid bottom of March 2020. We had a tremendous run, but that is of no utility for those buying recently of course.
If we compare those charts a bit more, we can see that the correction started in mid-April in both instances. That volatility then gradually decreased together with the price in July. If the 2013-template were to play out, one should expect the price to slowly revert upwards soon.
That is of course one way of looking at it. Another would be to acknowledge the potential head and shoulders pattern in the 2021-chart. Such a pattern was not materializing in 2013 and may pose a threat of further break down in price. I am undecided, but with a somewhat bullish bias. I may deviate from the algorithm and buy a position in BTC in anticipation of a bullish move. If however the support near 28k fails, I am afraid we will see an even deeper correction.
The bond and gold-market
The 10-year yield have come crashing down recently. Some argue this is due to the reverse repo problem potentially creating a deflationary bust. Some argue it is caused by the FEDs buying of bonds. I think it may be both. Whatever the reason, we are seeing bond yield dropping while inflation is increasing. That is very bullish for gold! As described in the Q1-2021 video, gold tend to trade very correlated to real yields in the medium term and the money supply in the long run. With falling yields and increasing inflation, real yields are dropping fast. Gold should prosper in such an environment. The same is true for quality growth stocks.
Some of you may recall that I shorted long dated bonds (that is being long yields by the way) a few weeks ago. I had that trade on primarily to hedge the gold position – and because I thought the market would bid up the yield to compensate for inflation. That did not happen, but I think it eventually will. Until then, I will keep an eye on yields, and short bonds if they were to regain their upward momentum.
The reflation trade – Oil and commodities
The reflation trade took a pause with the bond yield. Value stocks seized to outperform growth and the most spectacular commodities, such as lumber, took a massive hit. Some inflation are of course transitory, but not all. With the coming infrastructure bills, green energy and electric vehicles, copper, iron, silver, and several other metals will be of structural demand – and shortage as exploration and the construction of mines have been neglected for a long time.
Oil has been the exception, until recently. OPEC decided to increase production due to higher demand from the opening post Covid. The market took that as a bearish sign initially, but I expect this bearishness to be transitory. The oil producers (XLE) earn great money at today’s oil price and they are still not expensive in regard to valuation metrics such as price book, earnings etc.
Summary
I am not happy with the performance of the portfolio, but considering about 55 % drop in BTC and ETH – and even 75 % in LTC, one should expect a bump for the crypto portfolio too. During Q2 the portfolio was up 1 %. July belongs to Q3 of course, but considering the year thus far, the portfolio is up 24,73 %.
Some last words
Please be aware that strategies go in and out of favour. Trend following do not always work. When it does not work, doing the reverse (buying dips and selling spikes) do. If you as a copy trader waits for my results to shine, the chance that you are late to the party increases. I have noted that I gain copiers during the good times, and loose them during the not-so-great ones. That is unfortunate. Please understand that my strategy is trend following. That means that I mostly buy after the price have made a significant bottom and held a trajectory upwards for some time. That means that I buy on delayed price action. If you as a trader copies me after I have made a great performance (trend following me), you are basically trend following a trend follower. That will cause bad performance for the copy traders – almost certainly.
You should also note that this is a very risky and volatile portfolio. I will do my best to be transparent about what I am doing and why, but please understand that your capital is at risk. I will however always do my best to grow and preserve our capital.
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