I published a series of posts previously on my take on the various markets. Today I will just want to do a quick update.
In my earlier post, I mentioned that I was waiting for a rebound as the market was technically oversold. This week we saw the rebound and the first weekly green candle after weeks of sell-off.
You see that the market tested the 38.2% fib retracement level but did not close the week above the long-term trendline in orange. Which is not that convincing for a rebound. Hence, it is important to see what happens next week.
However, it is interesting to note that the high yield bonds are being bought with relatively high volume (chart above) despite the decline in equities yesterday. This to me indicates that fear is subsiding for now and market is becoming greedy again. Overall market sentiment is gradually turning back into "risk-on" mode, at least for now. This is pretty much aligned with what we are seeing in the greed and fear index.
Hence, I personally think that the rebound will continue next week. Although it will still be a bumpy ride as volatility remains high. Let's see if we can get a second weekly green candle next week. Don't get me wrong, I remain bearish of equities in the longer term as discussed in my earlier post. But I treat this short-term bounce as a trading opportunity.
Gold is an interesting market to watch during this time as huge amount of money are being created by the Fed. To tackle the current crisis, the Fed has promised unlimited QE and the US government had just passed a $2.2 trillion package to help the economy.
As compared to the 2008 global financial crisis, QE only started when it was pretty late into the crisis in November 2008. When QE started, gold almost immediately began a multi-year rally, more than doubling in price over 3 years.
Will it be the same this time round? The equities and credit markets are still very volatile at this point. So many market participants still prefer to hold the US dollars. However, volatility will not last forever. Eventually, when the dust settles, I think gold will begin its rally.
Gold is the default hedge for inflation for the baby boomers but the millennials seem to favor Bitcoin. On Twitter, people like to debate about which is a better hedge. To me, the debate is pretty irrelevant because gold and bitcoin are not mutually exclusive. You can own both of them.
In fact, the correlation between gold and bitcoin is on the rise. Looking at the chart below, the correlation coefficient of bitcoin and gold has been positive most of the time since June last year.
There is also a theory that Bitcoin will crash as a result of the recession. While that is not impossible, I think it is not so probable for a couple of reasons.
First, the Bitcoin market cap is a drop in the ocean when compared to other markets. As it stands, Bitcoin has a market cap of $121 billion. While it seems like a lot of money to individuals like us, it is nothing compared to the trillions in equities, bonds, commodities and derivatives. Hence, from a macro perspective, even if Bitcoin goes to zero, the amount of liquidity freed to the economy is negligible. Of course there will certainly be sell-off due to leveraged traders rushing for liquidity as I explained in my earlier post, but I think that is largely over.
Second, with the Fed injecting trillions of liquidity into the market, the money has to flow somewhere. The narrative on why people will sell Bitcoin during a recession argues that it is a risky and unproven asset. Let's agree with that for a moment and consider this. Between bitcoin and risky junk corporate bonds that would have defaulted if not for the bailouts, which will you prefer to hold? As mentioned earlier, we are seeing some life in the junk bonds market, indicating that fear is turning to greed. So if people are buying junk bonds in seek of higher yields, what makes you think that the same will not happen to bitcoin?
Regardless if you view Bitcoin as a risky asset or as a hedge against inflation, both narratives seem to suggest more upside potential than downside. Furthermore, with the bitcoin rewards halving coming in less than 50 days, I think one will have to be really desperate to liquidate his/her bitcoin now.
Again, I am just sharing my thought process and please do not take it as financial advice. Due diligence and research is still required for your own investment.
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