“The sky is falling! The sky is falling!” I exclaimed.
My friends looked at me like I’m Chicken Little as I raised the alarm bells, yet again, on signs that the markets are showing signs of a collapse.
“That’s what you said the other time, and my inverse ETFs are still in the red,” Leon casually rubbed it off, as they went on to talk about how their tech stocks are up around 30 per cent while some other sectors are down. To be fair, I never knew about or advocated for inverse ETFs, and Leon acknowledges that it was his decision based on my suggestion of “reducing exposure to riskier assets or doing a hedge”.
“No, you guys are not hearing me! The dollar index and bond market (DXY and TLT for me) have both reversed bullish, and have crossed my threshold. I’ll be going more risk-off if these two close bullish on the Weekly,” my voice gradually drowning in the optimism of a pullback that will push higher.
The US dollar index, DXY, is “a measure of the value of the United States Dollar (USD) against a weighted basket of currencies”. Some people believe simply that “more money printing equals more money supply equals to weaker dollars” but it’s really more complicated than that.
I use DXY as a gauge for the demand of dollars. And I’m on the side of Brent Johnson’s dollar milkshake theory, and the very fact that the USD is the world reserve currency will have implication on its demand and price.
On the other hand, TLT refers to the 20-Year US Treasuries ETF. You can look at shorter-term treasuries too, but in this case, I’m using TLT as a gauge for investors’ risk appetite so I choose to use a longer-term outlook.
Bond prices are typically inversely correlated with yields, so if the FED raises the interest rates, you can expect bond prices to drop. So did DXY and TLT turn bullish because of the FED announcement last week? Well, that appears to be the most direct cause but I won’t be diving into that. Instead, I’ll be just sharing how the bullish DXY and TLT affects my sentiments.
Before you read on, please note that this is my subjective and untrained opinion. There are also other macro factors that are influencing my opinion, which I’ve not laid out here, so you may not be getting a full picture i.e. this is biased. Also, price levels used are based on technical analyses.
- Demand for dollars: When DXY is bullish above 92, the possibility of a bullish reversal suggests that investors want to hold dollars instead of other risk assets.
- Risk appetite: When TLT is bullish above 142, the possibility of a bullish reversal suggests that investors want to move towards less risky, and dollar-denominated bonds.
- Note that there can many other reasons for either DXY or TLT to be bullish e.g. money supply, interest rate, fiscal policies etc.
- If either DXY or TLT cross the threshold, it merely raises the alarms, but should never be definitive. Conversely, if both DXY and TLT stay below the threshold, it gives me more confidence to dabble in riskier assets as I should still have the luxury of getting out in time.
- In the first half of 2021, there have been multiple instances when either of them turned bullish. DXY crossed 93 near the end of March and came back down, while TLT surged above 140 in April before coming back down. Ding ding ding, alerts but nothing too concerning.
- This week, DXY closed at 92.32 and TLT at 145.73. Can they come back down? Quite possibly, and I hope they do, so that I can take on more risk confidently but if they continue upwards, there will be an increasing need to go risk-off.
Several years ago, I have thought that when equities collapse, the residual outflow of money can move into cryptocurrencies. That can be how the shift towards a new paradigm occur where people will buy cryptocurrencies whether as an alternative currency or asset.
Is that still possible? Perhaps. Is that plausible? I’m not so sure anymore. Today, I still envision the possibilities with crypto but I’ve also realised that to most people, crypto is a highly risky and speculative asset, and for as long as crypto stays that way, they will remain highly correlated with equities.
Hence, my investment thesis of risk-off or risk-on for cryptocurrencies assumes that cryptocurrencies are a highly risky asset. DXY and TLT are just signs of the macro landscape. Should crypto become institutionalised, it can deviate into its an asset class of its own. When that day comes, it can even be a primary asset, but institution adoption is another conundrum.
Let’s just say that my thesis plays out, and it is right to go risk-off, what does that mean? Everyone will have different interpretations depending on their beliefs (just as my friend Leon did), so here’s mine:
- I am long crypto and have a fraction in a hardware wallet that’s a do-not-touch fund i.e. HODL. These are not affected by the risk environment.
- For the portion that I plan to hızlı ticaret, risk-off means selling even if at a loss. But that will also mean that I am prepared to re-enter the market. My goal is to increase the size of my crypto pool but I’m also aware that this can cause me losses where I end up with lesser crypto.
- I have another portion that I trade as a çit. If I have too big a holding of a particular coin (a long trade), I will go short at major resistance levels with a tight stop loss. I highly advise against this if you do not have any experience trading — short squeezes are an everyday sight and you can quite easily wipe out an account in crypto.
- I’ve also been looking at leveraged tokens as a hedge, but I’ve mixed results on using these and shall deem it inconclusive thus far.
On the side, I have also been diversifying out of risk assets into dollars and bonds. So yes, the strategy involves a lot more steps and considerations.
So are equities safe or risky assets? I’m of the opinion that they are risky assets, especially with the prices that they have surged to, but hey, many others beg to differ and I’m fully aware of that. Arguments for equities include:
- Over the whole history of the stock market, the only right way to invest is hold for the long term and to keep averaging in
- Modern money theory (MMT) will persist and the value of equities will only appreciate against the value of money in the long run
- Equities can be a dividend instrument alongside capital appreciation
- Equities are risky, but trusting in the endless supply of money is way riskier
- Money revolves around different sectors of equities, but as a whole, they’ll just go up as you can see from the indices
- Invest in ETFs rather than individual stocks if you want a more diversified equity portfolio
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Source: https://medium.com/@h.ansel/the-sky-is-falling-5604a23fdc3e?source=rss——-8—————–cryptocurrency
