Deleveraging COVID Bubble – Possible Volatility Risks In Foreign Markets

I get asked all the time what my opinions are regarding the markets. As much as I could go into really deep details regarding technical analysis and other factors of my research, the simple answer is that we’ve been living through 2~4+ years of incredible market trends and unprecedented global central bank efforts to support and contain market risks. This is something we have not seen at these levels since the end of WWII and after the Great Depression.

Is there a Speculative Bubble Deleveraging Risk In The Global Markets?

The one thing that keeps popping up in my mind is the deleveraging of credit/debt and speculative risk assets over the next 2 to 3+ years. Let me explain what I mean by this statement.

Before the first COVID event (February 2020), the global markets were already within a moderate strengthening phase with relatively stable global trade, economic, and central bank participation. Everyone was still waiting for inflation to rise while employment and economic data continued to strengthen. When COVID hit, things changed very quickly.

  • Global lockdowns disrupted the labor and supply markets.
  • Consumers shifted gears while settling (or moving) into more rural locations attempting to wait out the new COVID threat.
  • Global central banks and governments attempted to navigate the catastrophic COVID event while settling population and finance issues.
  • An unprecedented amount of stimulus, global central bank financing, and speculative capital was unleashed over a very short 3 to 4-year span of time.
  • The success of the global economy prior to 2020 prompted a very deep and efficient speculative market trend in 2020 and beyond.
  • Now, that speculative bubble appears to be bursting – at least in certain areas of the markets.

Let’s explore a bit of data and charts.

This first Monthly chart highlights trends in various global market indexes. ARKK, the ARK Innovation Fund, HSI, the Hang Seng Index, DAX, the DAX Index, SPY, the S&P 500 ETF, and HXC, the Golden Dragon China Index. Each of these represents a unique component of global markets and sectors.

ARKK represents technology, innovation, and a more broad global investment style focused on stronger or more highly volatile price trends.

HSI represents a broad market China Index that includes various markets sectors – including Technology, Medical, Consumer, Real Estate, Finance, and others. These companies are listed in China and do a majority of their business in China.

DAX represents a broad market German Index.

SPY represents a broad market US Index

HXC represents the US-listed Chinese Companies doing a majority of their business in China.

The purpose of showing you this chart is to highlight the deleveraging that is already taking place in ARKK, HXC, and the HSI. The DAX and the SPY are still trending higher, while the ARKK, HSI, and HXC are trending strongly to the downside.

Chart, histogram

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It is my opinion that the global markets, particularly China/Asia, are already in the midst of a massive speculative deleveraging event – a post-bubble rally phase initial collapse process. Certain technicians sometimes call this an “unwinding” or “unraveling” event. Ultimately, the US has seen two of these types of events over the past 30 years – the 1999-2000 DOT COM bubble burst and the 2008-09 Housing Market collapse.

What I found interesting is the HXC price levels have already fallen to levels near the March 2020 COVID lows. Whereas the HSI price levels have also fallen to very near the March 2020 COVID lows, it has also fallen into negative price trending from 2014-15 price levels.

Could Speculative Deleveraging Stay Localized This Time?

I think global volatility and bigger price trends will be something we need to prepare for in 2022 and 2023 – possibly even longer. Yet, my opinion is the US, and other stronger global economies may be partially immune from this speculative deleveraging event.

Why?

Because not every US corporation or citizen has put themselves in a similar scenario as I believe many in China and Asia possibly have after nearly 30+ years of extreme growth trends.

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The US has experienced the 1999-2000 DOT COM bubble and the 2008-09 Housing Market crisis over the past 30 years. At the same time, China/Asia has grown from moderate obscurity in the 1980s-1990s into extensively powerful economies. Along the way, over a relatively short period of time, a generation or two of the populous has seen assets rise thousands of percent over the past 20 years. This leads to a highly speculative investment class – almost feeling as though anything they touch turns to gold.

But it doesn’t always work out that way – does it?

This HXC chart highlights the incredible rally after the February 2020 COVID event as well as the moderate growth phase from 2005 to 2016. Notice the big growth that took place in 2017. This was a period of very strong economic growth where Chinese companies started listing on US exchanges to tap into a strong US investor class.

After COVID hit in 2020, this speculative investing trend skyrockets over 180%. Then, it collapsed.

Chart, histogram

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Bitcoin May Follow This Deleveraging Trend If Panic Sets In

The recent rally and peak in Bitcoin have also caught my interest in seeing if this deleveraging event follows through in large Cryptos? Since the initial Bitcoin collapse in early 2021, Bitcoin has rallied strongly as the US markets recovered and inflation started to rise later in 2021. Now, a very strong pullback in Bitcoin has started at the same time large Chinese Real Estate developers and other corporations are beginning to experience severe credit/debt concerns.

Is there a correlation between Chinese/Asian consumer/economic strength and Bitcoin? Has the rise in Bitcoin prices over the past since 2015 been fueled by the rising speculative and investment trends in China/Asia?

We’ll know soon enough.

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If the global markets continue this process of speculative trading deleveraging, we’re going to see an increase in volatility and deeper price trends take place before the process completes. I suspect there is a huge amount of underlying credit/debt that is struggling in certain areas of the world right now. This type of speculation tends to drive a mentality of FOMO (fear of missing out) and YOLO (you only live once). I remember after the DOT COM bubble burst, I would talk to people that were so entrenched in the bubble, and they bought all the way through the collapse – believing it would bounce back.

This deleveraging event should stay somewhat immune from certain larger market economies. Yes, there will likely be more volatility and bigger price swings. But, eventually, the strength of consumers and economic trends will settle most of this process fairly quickly for the largest global economies.

2022 and 2023 are sure to be great years for traders. Sectors will rotate and trend. The world’s strongest economies will rotate and trend. The increased volatility will create risks, but it will also create incredible opportunities for profits.

Get ready; it looks like this deleveraging event is just getting started.

Want to learn more about deleveraging and volatility risks in the markets?

Learn how I use specific tools to help me understand price cycles, set-ups, and price target levels. Over the next 12 to 24+ months, I expect very large price swings in the US stock market and other asset classes across the globe. I believe the markets are starting to transition away from the continued central bank support rally phase and may start a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern start to drive traders/investors into Metals.

If you need technically proven trading and investing strategies using ETFs to profit during market rallies and to avoid/profit from market declines, be sure to join me at TEP – Total ETF Portfolio.

For a look at all of today’s economic events, check out our economic calendar.

Have a great day!

Chris Vermeulen
Chief Market Strategist

 

Stocks Move Higher As Traders Stays Optimistic Despite Recent Sell-Offs

Stocks Gain Ground At The Start Of The Week

S&P 500 futures are gaining ground in premarket trading as traders look ready to buy stocks after Friday’s sell-off.

Recent trading sessions have been volatile, as some traders sold equities on fears over the new variant of coronavirus while others were willing to buy stocks at discount.

It should be noted that Nasdaq futures are losing ground in premarket trading as the sell-off in the tech space continues. The market is not ready to tolerate sky-high valution levels in case companies do not show strong growth. Broader bullish bets on the high-growth market segment like ARK Innovation ETF have been under significant pressure in recent weeks.

The weakness in the tech space may have a material impact on S&P 500 as leading tech stocks have a significant weight in the index. In premarket trading, Apple stock is moving higher while Tesla stock is down by about 2%. Alphabet, Microsoft, Meta Platforms and Amazon are mostly flat.

WTI Oil Moves Higher As Saudi Arabia Raises Prices For Asian Customers

WTI oil continued its attempts to settle above $68.50 after reports indicated that Saudi Arabia increased prices for Asian customers by up to $0.80.

Recent reports from South Africa suggested that Omicron cases were not severe, and it looks that the panic over the new variant of coronavirus calms down. However, oil markets will likely remain sensitive to any news about Omicron and its potential impact on oil demand in the upcoming weeks.

Not surprisingly, the upside move in the oil markets provided support to oil-related stocks, which look ready to gain ground at the start of today’s trading session.

Gold Tries To Settle Above $1775

Gold managed to get back above the $1775 level and is trying to develop additional upside momentum despite higher Treasury yields and strong dollar.

It looks that the recent sell-off in crypto markets, which pushed Bitcoin below the $50,000 level, provided support to gold.

Meanwhile, gold mining stocks will likely find themselves under pressure at the start of today’s trading session as investors remain cautious towards this market segment.

For a look at all of today’s economic events, check out our economic calendar.

ARK Innovation ETF Dips Amid Tech and Crypto Market Selloff

Cathie Woods heads Ark Invest, and she has become popular for picking stocks that are out of the ordinary. Her asset management firm also invests in cryptocurrencies as she is bullish on BTC and other cryptos.

Market Selloff Affects Ark Innovation ETF

The shares of Ark Innovation ETF dipped by more than 5% during Friday’s trading session due to the massive selloff within the tech and cryptocurrency markets. Investors sold high-growth, high-valuation stocks that rallied during the early stages of the pandemic following bets that the US Federal Reserve will be more aggressive moving forward.

ARKK suffered huge losses as nine out of the top ten of its holdings experienced a massive selloff. Tesla Inc., ARKK’s largest holding, lost more than 4% of its value yesterday, while Teladoc Health Inc., its second-largest holding, dropped 5.2%.

ARKK performed excellently over the past 20 months as the fund invested mostly in stay-at-home stocks. With the pandemic raging on for months, ARKK was one of the best-performing funds in the world during that period.

ARKK Suffers Huge Losses in Recent Weeks

Cathie Wood’s Ark Innovation ETF has suffered huge losses in recent weeks, down by more than 25% over the past month. The decline comes after the US recorded 210,000 jobs in November, pushing the unemployment rate to a 21-month low of 4.2%. The increasing employment rate spells danger for stay-at-home stocks, and that ultimately affects ARKK’s portfolio.

The decline in the cryptocurrency market also contributed to ARKK’s poor performance. ARKK invests in Bitcoin ETF’s in Canada and other cryptocurrency-focused exchange-traded funds. As a result, the dip experienced in the crypto market affected its performance.

Year-to-date, ARKK’s value has dipped by nearly 25%, making it one of the worst performers in the market. The ETF’s value could dip further if the current market momentum is maintained.

Chinese Crackdown on Bitcoin Another Blow to Cathie Wood’s ARK ETF

Wood, who has said that bitcoin will rally to $500,000, has slightly more than $1 billion invested in cryptocurrency trading firm Coinbase Global Inc, a position that makes up approximately 4.7% of her $21.7 billion fund. Shares of Coinbase fell more than 1.5% on Friday after Chinese regulators announced a blanket ban on all crypto transactions and mining.

China’s move triggered a selloff in bitcoin, taking the value of the world’s largest cryptocurrency down more than 5% to approximately $42,475.

ARK Innovation was down 1.4% in midday trading on Friday.

The declines come as several of Wood’s top holdings this year are floundering during a market rally that has pushed up the benchmark S&P 500 more than 18% for the year to date.

While shares of Tesla Inc, Wood’s top holding, are up 8% for the year, large positions in companies including Teladoc Health Inc and Zoom Video Communications Inc are down 20% or more over the same time amid a shift away from the stay-at-home technology stocks that dominated during the COVID-19 lockdowns of 2020.

ARK Invest did not respond to a request for comment on this story.

Overall, the ARK Innovation Fund is down 4.4% for the year to date, putting it in the bottom 100th percentile among the 595 other U.S. mid-cap growth funds, according to Morningstar.

Over the last five years, however, the fund is up an annualized 42.3% a year, placing it among the top 1 percentile in its category.

That strong long-term performance is likely what is keeping retail investors from selling their stake in the fund this year despite its poor showing, said Todd Rosenbluth, director of fund research at CFRA.

“ARKK is down for the year and has significantly lagged behind index-based growth ETFs yet most investors have remained loyal, likely due to fond memories of prior periods of relatively strong performance,” he said. “But as the recent period of underperformance persists it is harder to justify not considering alternatives.”

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by David Randall in New York; Additional reporting by Saqib Iqbal Ahmed in New York; Editing by Ira Iosebashvili and Matthew Lewis)