Psychologically, humans tend to want permanence – something to set and forget. But life (and the market) sometimes has other plans.
Recently we saw market data disintegrating, thus creating volatility. And then along came a complete reversal, just as fast as the volatility appeared. Here's what we think is happening:
- Earnings season has been stunning with almost 90% of companies outperforming all expectations
- Hyperinflation fears are driving volatility, with intensified selling over the last couple weeks
- President Biden's tax plan, specifically higher corporate tax rates, has been a headwind for growth stocks (dividend stocks have been swept up because there is no talk of raising those tax rates)
- Volatility hit a fever pitch on Wednesday, May 12, when Wall Street fears were elevated as the Consumer Price Index rose 0.8% instead of an expected rise of 0.3%
But as we saw a reversal starting Friday, May 14, growth began to bounce a little (although early last week we did see some volatility pop back up only to reverse again late in the week). Investors noticed that lumber prices continue to fall, along with iron ore, and the 10-year Treasury yield:
These price declines indicate that we may have hit peak inflation fears. If so, growth stocks will be ready to bounce off their lows. Again, this is because Wall Street and investors’ greatest worry is hyperinflation. In what could be possible evidence of the fear subsiding, the exaggerated selling we saw all but evaporated by Friday, May 14, in MAPSignals’ trusty Big Money Index (BMI) chart:
So, with all that in mind, the question becomes – are the lows in for growth stocks? The data say possibly, maybe even probably, but we would need to see more data consistently for confirmation. Although the current data is showing positive signs as growth stocks aren’t breaking down like the prior few weeks. However, remember timing the exact bottom is a fool’s errand. Investors looking for growth discounts really could find this time as a great buying opportunity, even if we may not have hit the exact bottom.
We wanted to look even further into the data by breaking down “big money” trading more. We filtered the trades down to the “best of the best” equities in terms of sales and earnings growth over the past three years. That filter left us with 93 stocks being bought under the surface. In other words, the big bounce on Friday, May 14, was concentrated in growth stocks.
The list screams short covering and bargain hunting in beaten down growth stocks. While we know a single day is merely a blip on the radar over time, this does feel like the market is setting up for better prospects ahead. The bottom line is brace for more short term market volatility but we believe most of the pain is behind us.
The Head and Shoulders of Bitcoin
We would be remiss not to address the volatility in Bitcoin last week. And with all due respect to the Technoking and Master of Coin, we want to examine what happened with Bitcoin’s technical aspects and the government regulation surrounding it.
From a technical standpoint, Bitcoin’s chart looks like a classic Head and Shoulders top formation:
Typically, this pattern indicates downward pressure from institutional investors, which makes sense because Bitcoin has received institutional investments over the past year or so. We think that pressure is one of the catalysts for last week’s downturn, which saw Bitcoin lose more than 30% in a day.
To give you an idea, the top trendline being tested last week was at about 39,800. When we broke through it last Wednesday, it crashed down to the next technical trendline of 30,800, where it found support and rallied back up to the 39,800 trendline.
These are classic technical moves. The question then becomes, what was the catalyst to cause Bitcoin to drop below the 39,800 trendlines?
We think most of the cause is due to the Chinese government’s crackdown on Bitcoin, which intensified last Wednesday, May 19. We've said before the biggest risk to Bitcoin over the long term is government regulation. We point this out because last week was a good example of government intervention creating a catalyst event that triggered technical trading at an institutional level.
With “big money” involved, along with an already strong individual investor appetite, Bitcoin can hold a valid place within portfolios as an alternative investment or inflation hedge. But as with any investment, investors need to understand what they’re purchasing (including the risks), and more importantly, make sure the asset is part of their plan for long-term success.
Securities sold through CoreCap Investments, LLC. Advisory services offered by CoreCap Advisors, LLC. Cornerstone Financial Services, CoreCap Investments, and CoreCap Advisors are separate and unafﬁliated entities.