Overview
S&P 500 index continued making new highs, following through on new highs made last week, and is now in a strong uptrend.
Rumors of the death of tech stocks were greatly exaggerated, as Google, Facebook and Microsoft make new highs. Even QQQ approached new highs.
Small stocks lagged this week.
Mega cap growth ETF returns are now running ahead of small cap value ETF returns over the short term, implying a potential shift in market leadership.
The value of the cryptocurrency market exceeded $2 trillion for the first time this week.
Key Question
With Ether reaching new all-time highs, and Bitcoin up more than 100% this year, can mere mortals even trade the cryptocurrency craze? We answer this question in detail below.
Performance Snapshot
Technology stocks put in a second strong week, with small stocks lagging badly again. The QQQ ETF and the ONEQ ETF, built with technology stocks and NASDQ stocks, were quite strong. The Russell 2000 index of small cap stocks lagged with a negative return for the week. There seems to a shift away from small cap stocks and towards large cap stocks (see more on this below), but it seems to run counter to the conventional wisdom that a strong economy and higher rates will boost small cap stocks over technology names over the next six months.
Trend Direction from Leveraged ETFs
The leveraged Bullish ETFs are confirming the rally, and in bullish mode. This indicator is sensitive, and can be whipsawed during consolidations. It turned bullish on 03/26, and the S&P-500 index is up 3.88% since then. The uptrend looks well established for now, with the average bullish leveraged ETF rank above 80%.
The bullish posture of the leveraged ETFs is confirmed by the breakout evident on the SPDR S&P-500 ETF (SPY) chart below. Note how all four of our oscillators are strongly bullish, with three of them pegged at 100, implying a strong uptrend.
Growth vs. Value Debate
The big investors had rotated into value stocks last year, and since September, short-run value stock performance, measured here using the Vanguard S&P Small Cap 600 Value ETF (VIOV), the orange line in the chart below, had kept near the top of the Vanguard ETF universe. However, after this correction that started in February, the big money has rotated into mega cap growth stocks, as seen by the new highs in Microsoft, Google and Facebook this week. The short-run performance of the Vanguard Mega Cap Growth ETF (MGK - white line below) is near the top of the Vanguard universe. Naturally, the question is how long will it stay there.
The Crypto Craze: A Brief History
Nout Wellink, the former head of the Dutch Central Bank, home country to the Tulip Mania, where tulip prices famously crashed in February 1637, said this in 2013 about Bitcoin: "This is worse than the tulip mania," he continued. "At least then you got a tulip [at the end], now you get nothing." Now, what caused him to say that? At the end of November 2013, Bitcoin traded around $198. At the end of December 2013, it traded at ~$947. Bitcoin had another historic run in 2017. Today, Bitcoin is around $58,000, so one wonders what the 17th century tulip traders would make of it.
As an aside, only a few more than 2 million Bitcoin remain to be mined, since about 18.7 million out of a possible 21 million coins have been found so far. Nevertheless, the worldwide data on bitcoin mining are revealing, in terms of the sheer scope of power consumption and their environmental footprint. For example, the authors of a paper in Nature note that China’s bitcoin energy usage by 2024 will surpass the total energy consumption of Italy or Saudi Arabia. The Cambridge University’s Cambridge Bitcoin Electricity Consumption Index has eye-opening visualizations mapping bitcoin mining. If Bitcoin miners were a country, the total energy consumption for bitcoin mining would rank #27 in the world. The involvement of nation states in bitcoin mining certainly changes the game. The US Federal reserve has some solid background material, and Governor Brainard’s speech paints the central bank perspective. A more cautionary view of cryptocurrencies in a possibly energy-limited future is found here.
Cryptocurrency and Block Chain Related Stocks and ETFs
As vehicle for pure speculation, Bitcoin, the largest cryptocurrency, has been consolidating under all time highs for the past several months.
Unless you are a billionaire, the Grayscale Bitcoin Trust (GBTC) is an easier way to participate in the cryptocurrency craze. A chart of GBTC shows that it is above the rising long-term trend line, but below a short-term one, in a triangular consolidation. The traditional interpretation of this symmetrical triangle pattern is to expect a breakout to the upside. Observe that both our long-term oscillators, COLT1 and COLT2, are trending lower since the February highs, and are in neutral or negative territory. A breakout would have to be confirmed by both these oscillators rising above 50. For the adventurous, a counter-trend entry would be to buy near the rising lower trend-line (should prices get there of course). A trend-following strategy would be to await the breakout to new highs and confirmation by the short-term and/or long-term oscillators.
Many other cryptocurrency investment alternatives are available, such as MicroStrategy (MSTR) or Tesla (TSLA), who have directly purchased bitcoin, or by investing in companies who have links to the block-chain technology underpinning cryptocurrencies, via the Amplify Transformational Data Sharing ETF (BLOK), or Innovation Shares NextGen Protocol ETF (KOIN), or payment firms like Square (SQ). Not to forget, there are also futures contracts you can trade on the CME.
Microstrategy (MSTR) is an interesting case. They have announced $1 billion direct purchase of bitcoin, directly owning over 70,470 bitcoins toward the end of 2020. The MSTR chart show the perils and promise of bitcoin ownership. The chart is certainly not for the faint of heart. MSTR has around 9,587,000 shares outstanding, so you can calculate the fraction of bitcoin you would own should you buy any of its shares (about 0.007351 Bitcoin per share if I am correct). Hence, for 136 MSTR shares (@$711 at 04/09/21 close), or about $96,696 you can “own” one Bitcoin through MSTR, which seems a bit steep (since 1 BTC ~ $58293) or so. Of course, in the real world you would pay transaction fees, which seem to range from 1.5-6%, so MSTR is still a more expensive way to own Bitcoin (this is an approximate calculation, without knowing the exact number of Bitcoin currently owned by MSTR; the numbers have been rounded for convenience).
Finally, we summarize the current technical status of the key bitcoin or block chain related stock, sorted by the sum of all four of our oscillators, from the technically strongest to weakest. It is a quick summary to get you started on you chart exploration.
Wrap-up
If you like to do your own research, my posts should give you a good starting point, with context and suggestions. You can visit my website, chandeindicators.com, for more information and ideas. I hope you will stay tuned, and also help, by subscribing, and recommending it to your friends and colleagues.
Thank you for spending some time with me.
Disclaimer
And now for some housekeeping. This publication is for “edutainment”, education, information, and entertainment purposes only. It is not to be construed as investment advice. Past performance is not necessarily indicative of future results. Our disclaimer at chandeindicators.com is included herein by reference.