Market Lab Report - Shorting stocks and crypto; triple threat

by Dr. Chris Kacher

Shorting stocks and crypto

The Fed's decision pushed markets lower as they indicated rates would stay higher for longer. This pushed CME FedWatch futures from no more rate hikes to one more rate hike in May 2024. Four of the six MMANGA AI-meme leaders are now below their 50dmas with only META and GOOGL slightly above their 50dmas. Underscoring the weakness of the overall market, NASDAQ breadth has never been lagging this badly. This suggests any economic weakness that induces a recession will pull down the major averages substantially more than would occur in a typical bear market. Possibly offsetting the magnitude of a correction is the exponential growth taking place in areas such as AI and blockchain as the pace of development in generative AI has remained at breakneck speeds. However, it could be argued that blockchain technologies experienced this rate of growth in its bull cycles but such was insufficient to ward off deep bear markets in cryptotechnologies where altcoins often fell more than -97% in 2018 since ETH fell -95%. So far since 2022 when the crypto bear market began, such altcoins have only fallen typically between -70% and -85%. Keep in mind that an altcoin that has fallen -85% in not just -12% away from -97%. Rather, it has to drop another -50% to be down -92.5% then fall another -50% to be down -96.25%. In other words, it would have to be halved in price twice to be down -96.25% from -85%.


Unemployment

Meanwhile, ShadowStats unemployment rates are far higher than U-3 and even the broadest measure U-6. To be counted among the U.S. government’s headline unemployed (U-3), an individual has to have looked actively for work within the four weeks prior to the unemployment survey conducted for the Bureau of Labor Statistics (BLS).  If the active search for work was in the last year, but not in the last four weeks, the individual is considered a “discouraged worker” by the BLS, and no longer is counted in the official unemployment rate.

Despite these gross distortions in the official unemployment rate, the trend is what is important. Unemployment is ticking higher since unemployment came in at 3.8% in the latest reporting period, up from a low of 3.4% (not shown in graph below).

In the UK, deep distortions in unemployment are just as bad as in the US. One cannot take the official stats at face value. It is illusory that the UK unemployment rate fell from 8% to 3%. This full employment has been used as the reason why inflation is high in the US and UK. The sobering reality is inflation is due to central bank money printing. Regulatory capture makes key sectors such as healthcare and education non-tradeable further spurring inflation. This gives the most powerful entities artificial monopolies. Yet, central banks claim they need to increase unemployment to decrease inflation, but the harsh reality is in the US and UK, real unemployment is already far higher than officially reported.  

Liquidity, bond yields, and the dollar

The triple threat of diminishing liquidity in the US and globally, rising bond yields, and a stronger dollar continues to put pressure on stock and crypto markets, though because many hedge funds are carrying sizeable short positions, this could create a short squeeze since markets have been in a sharp downtrend. Nothing ever goes down in a straight line for a prolonged period.

Watch for dead cat bounces such as the one we nailed in mid-September. The stocks on which we sent reports as shortable were quickly in profits. We will advise members as always on the best short sale set-ups.