What can stop the bloodbath?

The key to trading success is survival

TrackRecord Trading
TRACKRECORD DAILY
6 min readMay 10, 2022

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The market is now in the grips of a fear and confusion yet to be experienced in many years. What is an investor to do when the US Federal Reserve is hiking interest rates aggressively in an environment of persistently high inflation?

For now, the possible cause for a reprieve will be from inflation data showing that price pressures are not spiralling higher, or soothing comments from the many Fed officials who are scheduled to speak this week.

However, even soothing comments may not be enough as the market may now not be in a mood to listen to the reassurance of Fed officials who have been wrong about inflation for months now.

The key to trading success is survival. Resist the temptation to double down, and choose the safer path.

TRADING TIP

This the time to stay safe

With the harrowing selloff in markets over the past few days, many stocks are at really attractive prices now and some may even be tempted to get in on the value the current market offers compared to months back.

However, we should not discount the volatility that is currently in the market. Volatility usually occurs as markets try to determine the next trend in the market. Trying to get into a position now when the trend isn’t clear is a gamble and may even be taxing on you mentally if the market moves against you.

Safety first. There will be clearer opportunities when the dust settles.

DAY AHEAD

We have a few Federal Reserve officials speaking tonight: Williams (usually dovish, current voter), Waller (hawkish, current voter) and Mester (hawkish, current voter).

TRADING PLAN

1. Currencies:

EUR — Short the EUR. EUR remains weak.
Key resistance/support levels -
Multi-year support at 1.0600–10 is now broken decisively and 1.0640–50 will be the resistance for now.

2. Commodities: Uranium & Energy — Stay the course, but caution is warranted as the market is now in full risk aversion mode.

3. Stocks:

US Stock Index: The US stock market continues to fall. Nasdaq is now testing the lows last seen in March 2021. If that breaks decisively, the downmove could accelerate further.

Single Stocks: TrackRecord Model Portfolio is tracking the broader market for now.

Key risks: US Federal Reserve policymakers’ comments will dictate how the market perceives future policy path for now. The Ukraine-Russia war rages on, but the market impact is limited for now.

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WHAT HAPPENED YESTERDAY

Market Movement As of New York Close 9 May 2022
  • The US Treasury Bonds saw declines in yields. The US 2 year Treasury Bond yield fell -0.09% while the 10 year yield saw a drop of -0.07% to 3.05%. The move was mainly due to the weak risk sentiment caused by the aggressive sell-off in the stock market.
  • The US stock market fell hard in yesterday’s trading session as recession fears loom. The S&P 500 dropped -3.20%, the Dow Jones Index declined -1.99% while the Nasdaq fell the furthest at -3.98%. The fear that the US Federal Reserve will need to tighten even more aggressively to get inflation under control is leading to liquidations across the board.
  • The crypto market had a harrowing day with more than -10% movements in almost all major cryptos. Bitcoin and Ether both plummeted more than -11% to 30,088 and 2,229 respectively. Litecoin and Cardano saw a collapse of around -15%.
  • The collapse in the crypto market stems from Terraform Labs’ [the organisation behind UST, cryptocurrency LUNA, and Luna Foundation Guard (LFG)] liquidation of their treasury wallet of all of its bitcoin (about 42,530 bitcoin, or $1.3 billion). The liquidation is done in a bid to maintain the UST stablecoin’s 1:1 peg ratio to the US dollar which has broken for the second time in the past 3 days. UST dropped to a low of almost $0.60 in early Asian trading session today, as the supposed stablecoin lost the confidence of the market.

HEADLINES & MARKET IMPACT

Inflation outlook for consumers falls from record high, Fed survey shows

Notable Snippet: Consumers grew a little more optimistic about inflation in April, though they still expect to be spending considerably more in the year ahead, a Federal Reserve survey released Monday shows.

Inflation expectations over the next year fell to a median 6.3%, a 0.3 percentage-point decrease from the record high in March, according to data going back to June 2013. On a three-year basis, expectations rose 0.2 percentage point to 3.9%, which itself is 0.3 percentage point off the record.

The data comes with 12-month inflation in March running at 8.5%, the highest level since December 1981.

WHAT WE THINK: Although expectations are falling, we should note that inflation remains well above the Federal Reserve’s target of an average of 2%. We will see cooling measures continue until then.

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40% of bitcoin investors are now underwater, new data shows

Notable Snippet: Bitcoin is off nearly 55% from its November peak, and 40% of holders are now underwater on their investments, according to new data from Glassnode.

That percentage is even higher when you isolate for the short-term holders who got skin in the game in the last six months when the price of bitcoin peaked at around $69,000.

In the last month alone, 15.5% of all bitcoin wallets fell into an unrealized loss, as the world’s most popular cryptocurrency plunged to the $31,000 level, tracking tech stocks lower. Bitcoin’s close correlation to the Nasdaq challenges the argument that the cryptocurrency functions as an inflation hedge.

Analysts from Glassnode also noted an influx of “urgent transactions” amid this latest sell-off, in which investors paid higher fees, indicating they were willing to pay a premium in order to expedite transaction times. The total value of all on-chain transaction fees paid reached 3.07 bitcoin over the last week — the largest yet recorded in its dataset.

During the sell-off this past week, more than $3.15 billion in value moved into or out of exchanges, the largest amount since the market hit its all-time high in November 2021.

WHAT WE THINK: The crypto market will remain volatile during this period of time. Although the price seems attractive, extra caution should be taken when considering entering the market.

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Yellen says financial system working well despite ‘potential for continued volatility’

Notable Snippet: Treasury Secretary Janet Yellen believes the U.S. financial system is in working order, but that Russia’s invasion of Ukraine and China’s Covid-19 lockdowns are making some goods more expensive.

Yellen, set to testify before the Senate Banking Committee on Tuesday, said she and other top financial regulators wouldn’t be surprised to see market turbulence keep up into the summer.

“There is the potential for continued volatility and unevenness of global growth as countries continue to grapple with the pandemic,” Yellen said in her written testimony, which was released by the committee ahead of the hearing.

“Russia’s unprovoked invasion of Ukraine has further increased economic uncertainty,” she said. “The U.S. financial system has continued to function in an orderly manner, though valuations of some assets remain high compared with historical values.”

WHAT WE THINK: Perhaps Yellen’s definition of working well is just simply the ability to move money across the financial system. Inflation will be a worry for a while now and instability will be the norm in the financial markets.

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SENTIMENT

FX

STOCK INDICES

Best,
Phan Vee Leung
CIO & Founder, TrackRecord

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