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Crash Update: The MOST Bullish Signs Now

Crash Update: The MOST Bullish Signs Now

Today’s HOT IanCast Topics:

🔥 Interest rates, inflation, fear … and yet, ARK Innovation ETF (NYSE: ARKK) inflows = the most bullish thing I’m seeing right now. (1:20)

🔥 Today’s market vs. the dot-com bubble — TEN growth stock + eight bitcoin mining stock examples. (13:34) 

🔥 What happened with the Luna crypto crash … from top 10 market cap to 215 in days! (25:26)  


This is a major moment in crypto and the stock market.

But not for the reasons you might have imagined.

Although the markets took a beating, there’s good news!

Low prices!

When the Federal Reserve pivots, I believe we’ll see crypto skyrocket.

I think it’ll happen in the same phases we saw after the COVID crash:

Growth rebounded, the indexes followed, then bitcoin, then altcoins.

Bottom line: Crypto is a major disruptor. And right now, there are a lot of signs pointing to a massive run-up. 

Jump straight to the hot topics above or see the full story here: 

 

Hey everyone, welcome to this week’s IanCast. This week I want to go over several things. There’s a lot going on. I was going to talk about an alt coin of the week this week but there is so much that I don’t think it would fit in the video.

First we are going to go over inflation and what I am seeing there. We’re going to go through some of the details with that and then go over the Fed and stance on this. After that, I’ll talk about some of the stocks in the market that are just incredibly cheap right now.

We’ll look at their valuations and their projected growth, it’s still very high. Their growth estimates haven’t changed that much recently despite their crash in prices. I want to go over some of that and then get into crypto. Obviously the Luna UST situation is a big deal right now.

The crypto market in general is going down. That is scaring people quite a bit. I want to talk about some of the opportunity that’s going to be available in the market going forward and cover the severity of this crash in the crypto market and give some details on that.

 

Interest Rates, Inflation, Fear, And ARKK Inflows!

Let me share my screen and then we can get into inflation. On the screen you will see a detailed list of things that go into the CPI number. At the top you can see relative importance. This column gives you a view of how much weight each good is into the overall inflation number.

Table 1

I want to go over some of these because there is some interesting data. For energy overall it’s 8.295% of CPI. Month-over-month (MoM) it’s down 2.7%. After coming off an 11% gain last month it was expected this would be down. It’s still good to see from the energy commodities that I track pretty much everything spiked in Q4 and Q1 and it’s gone down since then.

Even some of the metals are going down. We might see a decline in energy going forward. There’s a lot of room for this to keep going down. As you can see, the year-over-year (YoY) is 30.3% inflation for energy overall. This is a significant part of CPI. That’s something to keep an eye on.

Then you go down to used cars and trucks. One of the biggest stories of 2021 was the used car prices. They skyrocketed. That was one of the main things that contributed to high inflation. That has come down for three months straight. That was -0.4% in April. This is 4.038% of inflation.

That’s a decent weighting. YoY it’s still up 27.2%. Right now with consumer sentiment where it is, I would imagine this is going to keep going down. There’s a lot of room for it to fall. If you look at a chart of the used car index, it’s still way higher than it was a couple years ago.

I think we could continue to see this to fall. Then we have shelter, which is basically rent and housing. This has been steady. This is a huge part of CPI, 32.452%. Owners equivalent rent of residences. This is a questionable statistic if you look into it, but we have to go with what they are giving us.

This is meant to measure the overall cost of housing. This is 23.816% of CPI. That was up .5% MOM (Month Over Month). It’s been around .4% to .5% for a while now. It’s up 4.8% YoY. I think we’re going to see within the next few months this is going to do down because of the huge decline in mortgage applications.

Consumer sentiment is very low. The biggest purchases people will ever make for the most part are a house and a car. Those things are going to be hit pretty hard, especially with mortgage rates where they are. I think we could see this go down too. It would be a huge weight on CPI in general.

The reason I want to bring CPI up anyway is because that is what the Fed is trying to fight. They want inflation to go down before they ease up on anything. They have been serious about that and have made it known they are going to continue to raise rates in the near future until they see a significant decrease in inflation.

US Consumer graph

I think their target percent is 2% and we’re still at 8.3% YoY. I wanted to point out that MoM is 0.3% and that’s pretty low. This is the lowest we have seen in over a year. December 2020 was 0.2% growth MoM. We haven’t been that low since, but we reached 0.3% last August and in April.

MoM is still up, but it’s declining. I think we would need several months of declining MoM inflation for the Fed to really ease up on what they are doing. I think that’s going to happen eventually and we will see them lower rates back down. I think markets are going to price that in beforehand.

Markets are always forward looking. People are keeping a close watch on commodity prices and general consumer sentiment. They are always forming opinions on what the Fed is going to do to this. We had negative GDP growth in Q1. I think that is something they are going to have to consider.

Especially if we have another negative quarter because, technically, two negative quarters of GDP in a row is a recession. Will they continue to push up rates into a recession when there’s low consumer sentiment? That’s a tough spot to be in. Powell has already said they are going to not raise 75 basis points in June.

They are still on track to do a double rate hike in June and another double in July. Then the final three meetings in September, October and November are expected to be single rate hikes. They are still expected to do seven rate hikes until the end of the year.

Will we see them change their stance on that? I would say most likely if we see another negative quarter of GDP or if we see another couple of months of MoM inflation being negative. Will we see that by July? Probably not. The GDP number won’t come out until after that Fed meeting.

So they could do double rate hikes in June and July. But the fact that Powell has already said the triple rate hike off the table is the beginning of them starting to ease their track here. The market was fully expecting that triple rate hike. The market was wrong about that.

I think since the market is forward looking they are probably going to see the Fed is going to back off here. Maybe they do back-to-back double rate hikes in the summer and then we see another negative quarter of GDP growth and they start to go the other way.

Either way, I think the market is going to start to price that in beforehand. The first thing money is going to go into is growth. That’s something to be aware of for sure. Inflation is an important thing to watch closely here. GDP is important. Consumer sentiment is important.

I will keep everyone updated on everything having to do with those things going forward.

Next, this is the expected Fed funds rate at the end of the year. As you can see, it’s still 2.625%. But that’s where it was back on April 21, about three weeks ago. The market did price in a huge triple rate hike for June and that was reflected here. You can see as soon as that Fed meeting happened it went down.

It’s still lower than where it was on that day. We are seeing the market start to realize maybe the Fed will ease their stance even more. Everybody is still super cautious. There is still so much cash on the sidelines, which we can see in DXY. The dollar is skyrocketing.

S&P 500 graph

This is the highest it’s been in 20 years. That’s saying people are going with the old mantra that cash is king. Another way you can recognize this through the market is the VIX. The VIX measures the amount of premium on put options. It’s basically a demand gauge for put options.

People buy put options when they are hedging against their portfolio. Basically hedging in case things go down. When stocks go down, put options go up. When people buy more puts, the VIX spikes. In the COVID crash it went to an all-time high. I think the intraday was even higher than this.

That was a huge spike for VIX because everybody was buying puts. Everybody wanted to be hedged fully because they thought everything was going to zero. In this case, you’re seeing the VIX high, but not nearly as high as previous crashes. The S&P is down about 20% and the VIX didn’t even make a new high on May 10.

It’s had a tough couple of weeks and the VIX hasn’t even made a new high is what I’m trying to say. You can see back here these spikes were even higher. In 2018 the market went down 20% but there was a huge, clear spike here around the bottom. That has not happened in this case.

To me, that means the institutions, the people who really drive the option market, are not hedging as much because they are mostly out of the stock market. They have already sold and don’t have that much to hedge, so they don’t have that much demand for put options.

You want to see the VIX make lower highs. That’s a bullish signal that we are getting close to the end. Sometimes you see it spike around the bottom. In this case, it hasn’t happened yet. Maybe it will. So far this is signaling to me that institutions are out.

From here, the demand for stocks is so low and stocks are so under owned. When the Fed pivots on this, or even beforehand, we are going to see a huge rally. Definitely something to keep an eye on.

 

ARKK Fund Flows

I want to add that ARKK continues to see more fund inflows. The net flows for the past month are now over $1 billion. That means they have seen $1 billion more inflows than outflows. That’s probably the most bullish sign I have seen in anything growth stock related in a long time.

The fact that people have such high conviction in ARKK says to me that these buyers are still hanging in there. Even though the price is crashing, they are still committed to buying. When we see the market turn around, I think growth stocks are going to lead the market higher like they did out of the COVID crash.

ARKK Funds FLows 2

If we zoom out, May is the highest net inflows since June 2021. We might actually end the month higher, we are only halfway through. We’re at $553 million of net inflows so far in May. Amidst all these bearish things in the market, everyone saying ARKK is going to zero, everyone criticizing Cathie Wood, meanwhile money is still pouring into this.

I know all these stocks are down and it’s really tough, but I think it says a lot if people behind the scenes are having demand for these stocks. These companies are taking market share and it’s crazy how much they have dropped. I actually wanted to go into some detail about that.

 

Today’s Market Vs The Dot.com Bubble

I have 10 companies here that are all high-growth companies, very disruptive companies.

excel chart

The amount of cash these companies have is immense compared to their market cap. Almost all of them have at least 20% in cash of what their market cap is.

For example, if a company’s market cap is $1 billion, it means they have $200 million in cash. This isn’t a normal valuation technique, but it puts into perspective the amount of cash these companies have compared to the blue chips and so-called safety stocks using all their cash to pay dividends and stock repurchases.

They’re even going a step further and taking out debt to fund these things. Meanwhile, their income and cash flows are not enough to cover their obligations. On the other hand, you have all these growth stocks that are flush with cash, don’t pay dividends and, for the most part, don’t do share buybacks.

Some of them might do a little. Their main focus is putting cash back in the business and growing. It costs a lot. That’s why a lot of them aren’t profitable yet. There are a lot of quality companies in here. I just wanted to show how much cash they have.

This is a real benefit in today’s market. I think cash was seen as dead weight for a lot of companies. You have companies sitting on tens of billions in cash. Other companies are paying out cash in dividends and share buybacks.

Their cash to debt ratios are also insanely high. The reason I want to point out this is blank for Lemonade and Poshmark is because they don’t have any debt. This is another benefit of these companies over America 1.0, so-called safety stocks. That’s still where people are flocking by the way.

If the Fed does go through with these rate hikes, they are going to be in trouble when they have to take out new loans in order to fund their share buybacks and dividend growth. They are going to have to pay more cents on the dollar to take out those loans and they are already hurting for cash.

But you have these disruptive companies. Desktop Metal has almost five times as much cash as they do debt. Plug Power has four times as much. Roku has almost five times as much. DraftKings has over twice as much. Then you have these other companies that all have more cash than debt.

You have Lemonade and Poshmark that don’t have any debt at all. That’s a huge thing people are missing right now in this market. When interest rates go up, if you rely on debt you are going to be hurting. You are going to have to borrow at a more expensive rate.

The forward price-to-sales on these is crazy too. Plug is by far the highest on this list with about 8.5. They have another things going for them. They have huge growth, more so than most other companies. Maybe that higher multiple is justified. We will see.

For these other companies, one to three for the most part. Lemonade is at 5. All these others are lower. When you have a company growing 20% to 30% YoY for years, it’s really something that their market cap is only twice as much as their expected 2022 revenues.

Excel Columns

Next, these two columns represent the amount that their revenue forecasts have changed over the past two months. For example, Desktop Metals 2022 expected revenues has dropped 4% over the past three months.

That might sound bad, but overall, considering how much these stocks are down — I’ll just skip to this column right now. Plug Power is the least at 71%. All these companies are down 80% or more. Desktop Metal and Upstart are down more than 90%.

Meanwhile, their growth forecasts haven’t really changed that much. You even have DraftKings with an 8.8% increase in their 2022 expected sales. Pretty much the same thing for their 2023 expected sales at 8.81. You have Upstart down 93% with their growth forecast going up over the past three months.

That’s crazy to me. These valuations are really interesting. They are something I don’t think we’re going to see too often. I’m not saying to go put all your money in this right now. This is not financial advice. I just find it fascinating the valuations these companies are getting despite their growth and despite the fact they are disrupting every industry you can imagine.

Going to their growth, in 2022 all these companies are expecting double digits this year. Desktop Metal is expecting double their revenue. Plug Power, 81. And so on. Six out of the 10 are expected to grow more than 30% this year.

For 2021 to 2024, their annualized growth rate is expected to be at least 15% for all these companies. Desktop Metal, once again leading at 66. Plug is about 50. Lemonade is at 52. All but two of these are over 20% growth for the next three years.

You wouldn’t know it by looking at their prices over the past year. This is different from the dot-com bubble. I want to bring this up because I keep seeing comparisons to ARKK and the dot-com bubble. Amazingly enough, the price is identical and the crashes are identical.

The difference is, other than the fact ARKK did it in half the time, a lot of the companies in the Nasdaq 100 actually saw revenues decline in 2003, the year after that crash ended. The market was pricing in the fact that these companies for the most part were not sustainable.

They didn’t have too much of a future in the short term. They were either just bad or ahead of their time. I think we are in a way different situation here. These are just 10 examples. I just pulled 10 for brevity sake. I could show a lot more. These companies have real growth and real disruption.

Unlike the companies in the Nasdaq 100 back during the dot-com bubble. That’s a huge difference. The market is treating these like they are a flash-in-the-pan stock that’s never going to see any demand again, despite their disruption and growth.

I wanted to give an overview of these stocks. I know it’s painful. These prices are something I couldn’t have imagined a year-and-a-half ago. I think they are extremely cheap compared to what the future holds for these companies.

Excel Ticker charts

Another thing I wanted to go over was Bitcoin (BTC) mining stocks. I have seven stocks here. Riot Blockchain, Marathon Digital, Hut8, Bitfarms, Hive Blockchain, Core Scientific and Argo Blockchain. These companies all have a ton of BTC. Obviously they are BTC miners.

They don’t want to sell their BTC because they believe in the future of it. They are hoarding their BTC. Combined between these seven companies they probably have somewhere between 40,000 to 50,000 BTC. Their valuation relative to that BTC keeps getting cheaper and cheaper.

I didn’t put the percent down for these stocks. I should have done that in hindsight. They are all down at least 80%, some of them 90% from their high in 2020. I think most of them topped out maybe early 2021. Regardless, they are down 80% easily.

The hash rate for these companies is the amount of computing power they generate. These are all enormous amounts. These are the leading companies out there that are public. They produce a ton of BTC. They are expected to grow a lot too.

Riot is expected to grow their hash rate from 4.7 to 12.8. Marathon Digital is expected to grow theirs from 3.9 to 23.3. That’s almost 6x. Then Hive is expected to almost double theirs by April 2023. Not all these companies give the details on that, which is why it’s only here for these three.

These companies are growing like crazy. They are mining a lot of BTC. I know BTC is down, but they are continuing to hoard it. They don’t want to sell.  In fact, they are probably excited because they are mining cheap BTC. The amount of crypto these companies hold, and this is in millions, besides Argo they all have nine digits worth.

Argo has about $81 million. Hive also mines Ethereum (ETH) so they have some of that too. Their market caps, to me, are extremely cheap considering this and the future of BTC. I know BTC is down, but I believe we are still going to see a huge recovery that’s going to blow away the $69,000 top we saw last year.

Who knows when that will be. I thought it would be sooner than it is. Regardless, these companies are going to hold on and their BTC is going to appreciate in the mid to long term definitely.

Their premium right now, for example, Riot, their market cap is 4.49x what they are holding right now in crypto. All these are under 5. Riot is actually the most expensive. For example, Hut8 is trading at just twice the amount of their BTC holdings. This doesn’t even factor in they have over $100 million in cash.

Some of them have several hundred million in cash. They have a massive amount of equipment they use to run the BTC mining operations. Yet, their market caps are, to me, cheap compared to all this. I wanted to bring that up too because it shows capitulation in the crypto market.

When growth stocks are weak, these are going to get hit too. They are getting the worst of both worlds with crypto being down and growth being down. I think these are going to be historically low valuations for these companies. I just wanted to show that as well.

 

What Happened With The Luna Crypto

Next, I want to get into the Luna situation. Basically, Luna is a blockchain that facilitates a stable coin called UST, which stands for US Terra.

Sluna tweet

The way this worked was you could redeem your Luna coins for UST or vice versa.

Any time you redeemed one UST, which is pegged to the dollar as all stable coins are, you could redeem it for one dollar worth of Luna. Or if say Luna is at $50. You could redeem one Luna for one UST. This was a model that I know was met with a lot of skepticism over the past year.

This is despite Luna being a huge market leader in terms of price. This model of algorithmic stable coin was totally exposed with this crash. This is a long thread. I’m not going to go through the whole thing, but I want to highlight some of the most important things.

So the Luna price is high, people burn their Luna because it’s basically another way of selling. They burn their Luna and want UST for it. They want to get into something stable. They are taking profits. For example, if you are selling BTC, you sell it into cash.

This is the same idea. When people do that, Luna is burned, but it also causes the Luna price to fall. When you burn coins they are wiped out of existence. That contributes to the overall scarcity. When you burn your Luna you are also basically selling it, so it contributes to the price falling as well.

That’s the balance there. When there’s a lot of people taking profits, there’s a lot of UST minted. That’s UST that didn’t exist before that’s diluting that market. When there’s a lot of UST and Luna is low, people could go back and redeem their UST for Luna.

$ust tweet

Then the UST is burned. There’s less UST in existence and more Luna in existence. Basically, UST become depgged. When that happened, people got scared because obviously it’s supposed to be pegged to the dollar and it crashed to 29 cents a couple days ago.

That causes a lot of fear. Another big mechanism of UST was staking it. You could earn 20% on UST through this thing called the Anchor Protocol, which was a buying and lending protocol on Luna. They promised 20% to everybody. On the surface, that’s dangerous sounding.

It turned out to be so. UST, a lot of people unstaked it from Anchor, bringing a lot of UST on the market that was otherwise being held onto for at least the mid term I would imagine. When that happens, it contributes even more to selling pressure. It drives the price of UST down even more.

At the same time, when they are selling UST they are minting more Luna, which is inflationary. When you sell the UST, you are pushing the UST price down. You are minting more Luna, which is deflationary. Because of all this fear, Luna was being dumped also. People were cashing out UST, inflating Luna and selling Luna.

It was a death spiral, worst-case scenario for this protocol. Luna was in the top 10 in terms of market caps. I think it might have been almost $20 billion. It went from $60 a week ago and it’s now a fraction of a cent. Not only because of the selling, but the fact that so many more were minted.

There are so many Luna right now in existence that even without the selling pressure it would have deflated the price to a fraction of a penny. It’s a weird, unusual, bad situation. The Luna Foundation Guard made a ton of headlines last month because they were buying BTC to back UST.

That was another downside of this. They had to sell their BTC to try to bring in money to buy UST to raise the price back up and keep it pegged to the dollar. Obviously they were not able to do that. I think UST is still trading around 40 to 50 cents. We will see where this goes.

It’s not looking good. I wanted to provide some clarity because I’m sure a lot of you are hearing about this. It’s one of the things that’s responsible for this overall crypto crash we have seen over the past four or five days or so.

Next is liquidations for BTC. They are the highest they have been in a long time. Starting May 8, $799.7 million in crypto liquidated on the long side, but also more than $200 million liquidated on the short side. This burned a lot of people. All market participants got hurt.

On May 9, it was more than $200 million for both. Then we haven’t seen as much liquidations overall. The short liquidations are getting hurt even more than the long liquidations at this point. We can see the liquidations for May 12 here.

total liquidations chart

Short liquidations are still higher than long liquidations, meaning there is a short squeeze going on.

A lot of people were shorting things after they went down 70% or more in a span of a week. When that happens, usually you get burned.

If we focus on BTC, short liquidations were the highest in months. $141.77 million on May 11. Long liquidations were more than $260 million on May 8.

A lot of volatility going on. A lot of action in the futures market. This was the biggest event we’ve seen probably since last May. It’s been crazy.

I want to also show the BTC dominance.

Market Cap BTC

This is BTC’s market cap relative to the rest of crypto’s market cap. That’s sitting at 44.45% right now. These are both weekly charts. This is the highest it’s been since November. The high was 45.22%, you have to go all the way back to October to see the last time it reached that level.

When you add stable coins into that, this is BTC dominance plus USDC, Tether, DAI, that spiked to 57.39%. BTC and these three stable coins contributed almost 60% of the entire crypto market cap just yesterday or maybe overnight last night. That 57.39% was the highest we have seen since last April.

That’s a 52-week high for BTC plus stable coin dominance, meaning people are fleeing alts. There’s a lot of fear right now. That’s what happens. People flock to either stable coins or BTC in that case.

I know it’s painful, but the fact BTC dominance is going up is actually a good sign. You want to see BTC lead alt coins out of a crash. Hopefully ETH does too. I would say ETH isn’t an alt coin. I would say it’s above that at this point. It’s not as big as BTC in terms of demand at this point.

Going forward, we might see that change. But at this point, BTC dominance is still the thing to watch in terms of alt coin season. If you go back to September and in Q3 2020, you can see BTC dominance went way up. From 58% here in September all the way up to over 73% in December.

BTC took a ton of market share here and then BTC went way down as that money that was in BTC flowed into alt coins. Stable coins were not nearly as significant back then. That’s why I included this here, just because stable coins are now over $200 billion in value in total.

They are now a big part of the market people should be watching in times like this. If BTC dominance keeps going up, that would be ideal. That’s going to lead to whenever the next alt season comes. That’s what I wanted to add about crypto.

Also, with this market in general, it’s very risk off with growth doing what it’s doing and crypto doing what it’s doing. Crypto has been weak for some time now unfortunately. That’s still seen as a risk-on asset. I would compare BTC to a mature tech stock. I know there’s been a correlation.

I doubt that’s going to be a long-term thing. Just to give an analogy, BTC is like a renowned blue chip tech stock and alt coins are like speculative growth stocks. You are going to see the same kind of action in each one.

When there’s something bad going on in the markets, when fear is high, you are going to see correlation in all risk assets because everybody is selling anything that is perceived as risky. Even bonds are getting hit hard right now because of the implied bond yield increase going forward.

The point is, I believe BTC is still going to be a huge part of the future of finance that ETH and DeFi are still going to be big. Even if they don’t go up in price in the short term, I still think the future is there. I think we’re going to see some good buying opportunities.

With that being said, when the Fed pivots I believe we will see crypto skyrocket. The same kind of phases will play out as the COVID crash. First, growth rebounded. That was the first thing in all asset classes. Then the indices followed. After that, BTC followed later in the year.

Then alt coins followed after that in the beginning of 2021, which was the peak of growth stocks. I think we’re going to see the same thing play out. To wrap this up with inflation, I think we’re going to need to see a few months of MoM declines and some considerable changes in inflation.

The fact that we’ve reached 8.5 and then it went down to 8.3 in April is good. But it’s not good enough for the Fed to turn their stance just yet. Maybe we’re going to need even three or four months before the Fed changes their stance. They already started easing expectations when they said the triple hike in June was off the table.

That’s the beginning. Going from the first step to the second step might take a little time. However, I think stocks and crypto are going to be forward looking as they always are and are going to be able to tell when things start to turn when inflation starts to go back down.

I think that’s going to lead to a huge rally in crypto and growth. I am not saying this is going to happen last week, but going forward I am insanely bullish on growth stocks and crypto in general.  Who knows, maybe sooner than expected. Just the valuations of growth stocks right now is super low.

If you have the time to hold on, I believe it will pay off. Again, not financial advice, but that’s just my view based on these companies, having tracked them and understood what their products are. Also, just seeing their growth rates, what they’ve already done and what they’re expected to continue to do.

Management in these companies is confident they are going to be able to continue doing that. Just the fact they have so much cash that they are able to put back in their business is huge. As for crypto, this is a major disruptor. The amount of BTC that’s been held by long-term holders is at all-time high.

You have almost two-thirds of the supply locked up. Diamond hands people who are not going to sell. That’s a recipe for BTC to go up. Maybe it will be a month, maybe three months, maybe six months. Things are happening behind the scenes to suggest BTC is going to go on a massive run.

It’s just a matter of when. Alt coins, I believe, will follow. With alt coins, you have to be more selective. There are some good projects, but a lot of them are not great. With alt coins, you have to do your research. That’s why I wanted to do an alt coin of the week.

I didn’t have time this week, but hopefully next week I’ll be able to do that again. Alt coins are definitely high risk, high reward. BTC during market downturns and market stress increases its market share. That’s a sign to me that BTC is seen as the safe asset in crypto.

I wanted to end with that. Hopefully everybody found this information useful and enjoyable. If you have any other questions, let me know on Twitter @IanDyerGuru or in the comments of this video. Hopefully everybody has a great weekend. Happy Friday. I will see you again next week.

Regards,

Ian Dyer

Ian Dyer

Editor, Crypto Flash Trader

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