It’s a Crypto-Fight… You Need Crypto-Might

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What the Heck is Crypto-Might?

Okay, okay – we’ll start with the exciting stuff and discuss the tiresome, overdue recession later. If you have been paying attention to the financial media, it’s all abuzz about the SEC approval Wednesday of 11 ETFs for Bitcoin, enabling investors to own cryptocurrencies without taking the extra steps involved in buying actual Bitcoin. They had been stalled for a few years while the SEC worked out how to regulate this new cryptocurrency class of securities in a manner that would offer the expected investor protections and security for a virtual currency represented by a complex set of numbers that you can neither touch nor see – but has the potential to make you wealthy if you catch the next wave up.

AlphaDroid Strategy: Crypto-Might DD

Tens of billions of dollars may quickly come out of cash on the sidelines to power these new ETFs, and thus Bitcoin, higher. This class of funds has had very wild periods of pops and drops interspersed with relatively long flat periods. The good news is that while ordinary momentum algorithms will get taken to the cleaners by such chaotic behavior, our Pop-N-Drop technology (to handle spikes well) and Backstop Dual Defense technology (to handle flat periods well), which were recently deployed, turns out to be a perfect set of tools for dealing with chaotic crypto funds. If you feel driven to do battle with Bitcoin crypto traders, consider employing our Crypto-Might Strategy to help you manage its volatility more profitably. Click a Strategy’s blue S icon and search for “Crypto” to find and import this strategy to your account.

Final Note: While cryptocurrency funds, such as Grayscale GBTC, have been around for a few years, some operated as trusts investing in Bitcoin futures or invested in companies providing services related to Bitcoin. These new ETFs are referred to as spot Bitcoin ETFs because they function like the GLD spot gold ETF that actually takes custody of the asset on your behalf. The GBTC trust is transitioning to a spot Bitcoin ETF structure. The Crypto-Might Strategy employs GBTC and other cryptocurrency funds with sufficient history to form a sound basis for the Strategy. However, it will be some time before the new wave of Bitcoin ETFs has sufficient history to usefully participate in a momentum strategy. Fortunately, the older funds already represent Bitcoin quite well.

Where the Market is Headed

Although the market rebounded strongly in November and early December, it measurably calmed later in December and continued to hold earlier “Santa Rally” gains through year-end. Investors often hold on to investments with significant gains through the end of the year before selling to delay paying capital gains taxes. While there appeared to be a bit of tax-selling the first few days of the new year, just days later a rebound suggests that investors remained bullish and quickly bought other things. Despite serious recession warnings from multiple technical indicators that investment professionals rely on, the allure of near-tern returns from AI and Crypto technologies currently appears to outweigh recession fears.

While the Fed had sparked hopes for an earlier-than-anticipated 2024 decline in interest rates, they have since strongly pushed back on the excess optimism of the media. This morning’s CPI report showed a slight uptick to 3.3% indicating that optimism for rate cuts early in the year is misplaced. However, historically, by the time the Fed sufficiently slows the economy and inflation, a recession has already taken root and begun feeding on itself. Regarding where the market is going, I would suggest that keeping rates higher for longer is not a plan for locking in a new bull market but rather a plan to deliver the painful medicine required to truly tame inflation. More on this below.

SPDR S&P 500 ETF - 6 Months

6 Months

SPDR S&P 500 ETF SPY - 6 Years

6 Years

Market Direction Change Holds

StormGuard can, and did, turn on a dime last November, to reflect the remarkably strong conviction of investors that the Fed is now likely done raising rates. In the two months since then, economic indicators have remained surprisingly robust. Some believe this foretells a soft landing followed by a secular bull, while others believe it foretells further inflation followed by a painful recession next summer.

StormGuard Does an About Face

The Institutional Momentum and Value Sentiment Indicators (below) are two of three primary components that can trigger StormGuard. The first evaluates the importance of institutional trading volume, whereas the second evaluates the importance of the relative number of new highs and new lows to ascertain a change in investor behavior.

Both indicators are now not only positive but are increasing, and the third one (not shown) is even more positive. For StormGuard to trigger again, at least one of them needs to be negative and declining. At this point in the month, it would take a quite serious drop in the markets over the remainder of the month to trigger StormGuard.

2024 comes with a long list of uncertainties regarding inflation, war, energy, the border, regulations, and the politics of this election year. There are way too many unknowns (including unknown unknowns) to have any real chance of predicting the 2024 market outcome.  Fortunately, the trend is our friend and will continually show us where the positive momentum is already developing.

Institutional Volume Trading Indication
Highs Lows Sentiment Indication

Market Direction Change Holds

While it is said that inflation occurs when we have “too many dollars chasing too few goods,” research over decades finds that the correlation is not as direct and simple as we would like to believe. In this excellent Seeking Alpha article Is The Ballooning Debt Really Inflationary? the author makes the case that if the debt is used to directly purchase a product or service it is inflationary – like government-supported student loans. However, if it is spent on infrastructure or to improve the efficiency of farming or manufacturing, then it can become deflationary. Of course, it is the average of government spending, corporate spending, and individual “spending vs. investment” that moves the inflation needle. Perhaps we aren’t all “going to hell in a handbasket” of deficit spending as quickly as imagined… so long as we keep “investment” and “spending” in reasonable offsetting balance. Hmm… like that’s going to happen … Not!

M2 is the total available “spending money” for the government, companies, and individuals

FRED Real M2 Money Stock

What’s the Recession Waiting For?

We have all heard economics professionals talk about the “Lag” between the Fed taking action and the effects being felt in the economy. When interest rates go up, many startups and fast-growing companies rely on debt to fund their growth. However, some cannot afford to have their loan costs double during a periodic loan renewal. Similarly, some homeowners with variable-rate loans may not be able to afford to have their mortgage payments double. Both can become bankruptcies waiting to happen – “zombie loans” held by “the walking dead.” Higher costs mean there will be less money available for goods and services or employees. Having both higher loan fees and lower revenue accelerates the problem to the downside. Any act by the Fed at this point is too little, too late to stop the approaching recession.

When examining the chart of bonds, inflation, and interest rates below the data suggests three important things:

  1. The Fed generally starts taking interest rates down a few months before a recession formally starts. That means that by the time anyone can confidently say a recession is certain, it is already too late to stop it.
  2. Bond yields track downward with a reduction in the Fed Funds Rate. This means that in any such recession, bonds will likely be back as a place to hide while equities take it in the shorts.
  3. Perhaps most notable is that for an amazing and unprecedented 15 years (2008 to 2023) the Fed Funds Rate was held substantially below inflation. Anything free eventually gets little respect and is likely to be abused. Near-zero rates are like fuel for an economic bubble machine… one that produces zombie companies, zombie real estate, and zombie governments.

M2 is the total available “spending money” for the government, companies, and individuals

RED: Fed Funds Rate,  BLUE: 10yr Bond Yield,  GREEN: Sticky Inflation

Bottom Line:

  • Most bubbles can be blown a bit bigger – Don’t leave any money on the table!
  • Keep an eye on StormGuard-Armor – Be sure you get while the getting’s good!

Announcement: SumGrowth Strategies and Merlyn.AI Merge

We would like to formally announce the merger of SumGrowth Strategies, LLC with sister company Merlyn.AI, Corp … we have become SumGrowth, Inc. The definition of who we are and what we do can be seen on our new Corporate home page We will be putting a higher priority on improving our service and offerings to both our individual and advisor subscribers. While formally merging did not cause a change to our personnel, it has streamlined our focus and efficiency for getting projects done (both little ones and big ones) for the benefit of everyone.

We’re always “doing something for you lately.”
It’s what we do! 😎

Sumgrowth Website

Patience, not panic! Rules, not emotion!
May the markets be with us,

Scott Juds

Scott Juds
Chairman & CEO, SumGrowth, Inc.

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Investing involves risk. Principal loss is possible. A momentum strategy is not a guarantee of future performance. Nothing contained within this newsletter should be construed as an offer to sell or the solicitation of an offer to buy any security. Technical analysis and commentary are for general information only and do not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of any individual. Before investing, carefully consider a fund’s investment objectives, risks, charges, and expenses, and possibly seek professional advice. Obtain a prospectus containing this and other important fund information and read it carefully. SumGrowth, Inc. is a Signal Provider for its SectorSurfer and AlphaDroid subscription services and is an Index Provider for funds sponsored by others. SumGrowth, Inc. provides no personalized financial investment advice specific to anyone’s life situation and is not a registered investment advisor. See additional disclaimers HERE.