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What’s With All This Volatility?!

What’s With All This Volatility?!

You know it’s been volatile. It sucks seeing your stocks down.

But why is the market kicking us in the gut right now?

Well, we’ll dive into that today.

You see, $1.3 trillion worth of single stock options expired last Friday. That’s the second-highest of all time in a single day.

That almost never happens.

That on top of the Federal Reserve meeting, there’s just a LOT of fear, uncertainty and doubt (FUD) in the market.

But Paul and I are still incredibly bullish — as you’ll hear in today’s video. And while there are no guarantees, we do believe this is fuel for a bigger short squeeze.

I think it’s going to be a sharp growth stock rally when it gets started.

We’re also giving you a crypto update. Do you think we’re still pulling for our $250K and $350K for bitcoin by June? See here:

 

Paul Mampilly: Good morning, Ian.

Ian Dyer: Hey Paul. How’s it going?

Paul: It’s going good. It’s Friday morning and it’s time for the IanCast. We will get right into it because we are running late and we want to get the IanCast to our team. I promised people in my Tuesday Bold Profits Daily where I went through some of the insane stuff I have been sharing with you.

That crazy expiration. The single-stock expiration was $1.3 trillion. Then shortly after, I find a second piece of data talking about the gamma positioning of option dealers, which was truthfully wild. Then there was another chart taken from someone on Cathie’s team at ARK Invest showing the positioning of long managers.

I want you to talk to all three. I know you collect call data for the America 2.0 watchlist for our options services. Go through those things, especially the first two as it relates to options. Then any other observations you have. What do those things mean and what does it portend for the near future, middle future and future future?

 

What Effect Did The Expiration On January 21 Have On Options?

Ian: The expiration on January 21 was the second-biggest in history with the amount of options expiring that day. Just on single stocks it was $1.3 trillion. When you add in options on things like futures, it ended up being $3.3 trillion all expiring on that one day.

The more money that’s in option contracts that’s expiring on any given date means the market makers are buying or selling shares of the underlying stock, indices, shares or whatever into that expiration date. As people get rid of their options or exercise them, it means there’s a lot of unwinding of hedges to do.

That creates for a lot of activity going on behind the scenes. When you have that much money all set on that one day it can create a volatile situation in the market. That’s what we saw heading into that Friday. This Friday it turns out there was a lot also because of things like the Fed meeting, Microsoft, Apple and Tesla reporting.

It’s been a unique time from that perspective. Another thing about the option expiration last week is that the market makers were short on their gamma positions. With options there are all these metrics that go into the valuation of an option.

Without getting too technical, basically when market makers are short on gamma they have to short when the market or underlying stock goes down and buy when it goes up. They add to whatever move the market is making. That can create a scenario where something like ARKK or Tesla will go down.

They are actually shorting into that move, which creates even more selling pressure. That’s exactly what happened in March 2020 during the COVID crash where everything collapsed in a month. The dealers ended up being short gamma and they were one of the big drivers of that move.

Coming out of that, we have still seen things move down a little bit, but it seems like the selling pressure that was there from dealers is no longer there. There was a lot of fear around the Fed meeting this week. I personally expected things to rebound, but it seems like that move got front ran.

You have to take it one day at a time. I do think the bottom has to be really close, especially with growth stocks. As we’ve been saying, the valuations on these have gotten really low. Some of these companies are growing at 30% to 50% a year and are trading at three or four times their projected sales for 2022.

Whereas Microsoft and Apple and companies like that are trading at seven to 10 times that expected revenue. I don’t think that kind of valuation mismatch can hold up too much longer. I think we’ve brought up the fact that private market valuations are way higher than what we’re seeing in the public market.

It’s what we saw for years before the huge run in 2020. I think that’s going to get smoothed out. I think the downside in growth is extremely small.

 

Is It A Bullish Sign If The Gamma Positioning Of The Dealers Is Negative?

Paul: Was I correct in interpreting if the gamma positioning of the dealers is negative that’s a bullish sign? Is that the right way to think about it?

Ian: It’s bullish because after that expiration date they are going to have to unwind all those hedges. In this case they were short a ton of stock. They had to slowly unwind that, which means they are buying stock. That means the selling pressure is getting smaller and smaller.

Paul: The other observation I saw is that Monday and even Friday while the expiration was going on, there was massive volume in buying of puts. It was also some kind of record.

Ian: I think you are right. I think it was an all-time record on the number of puts that were bought on just one day. When that happens, again, when people buy puts, the market makers are short them. Therefore, they have to short the underlying stock to hedge that.

It creates fuel for a bigger short squeeze later on because they are going to have to cover on those shorts once people close out their put options or exercise them. It’s just one more thing that could add to the short squeeze coming for growth.

Paul: What is your thought on the fact that the long equity managers — by equity managers we are talking about mutual funds and hedge funds — seem to be all in on what I am sensing they think is safe or else it’s just what’s gone up the most. Oil, banks, cyclicals of all kinds — that’s where they are long in a big way.

I’m imagining they are also pretty long in all those FAANG stocks. What are you thinking is going to be the impact of that?

Ian: That does seem like a crowded trade. I know some oil stocks are making new highs still. Some of the banking stocks made new highs just in the past couple weeks. XLF, which is the financials ETF, made a new high a week ago. These have been bid way up.

It’s part of two different trades. For the financials it’s part of the interest rate trade where everybody wants to be on the right side of what makes money during a rising interest rate environment. Oil is a play on commodity shortages or supply demand imbalance.

From what I have seen, crude oil is way up. Oil stocks have followed. What I have seen in the past is that the price of oil will keep going up but oil stocks will slowly move down. That’s a signal that oil itself is going to move down, which gets further weakness into that sector of the stock market.

I think that’s coming fairly soon, especially as the whole shipping scenario and supply chains continue to get back to normal. I think we are going to see that. I think we are probably going to see a lot of long-term highs made in oil stocks as we get out of this earnings season.

 

How Is SARK affecting ARKK?

Paul: You talked about growth stocks, our stocks, America 2.0 stocks, Fourth Industrial Revolution stocks. These have just been crushed. In some cases 80% from the peak. We were talking about it before and from the high we were expecting something.

I told you before something like 20-30%. Something like a normal correction. 80%? Really the collapse from November on seems to me engineered by some mix of short selling — then I updated this chart for this Tuttle Short Innovation ETF (SARK).

SARKK vs. ARKK

Since inception, it’s now up 65%.

ARK Innovation is down 44%. The Tuttle Short Innovation Fund I’m guessing has some call premium it is benefitting from where the option buyers are so excited to be buying ARKK puts, that they are willing to pay rising call premiums. Otherwise, this doesn’t make a lot of sense.

Earlier on it was pretty close, one for one. Now the decline in ARKK is flattening out and the performance of Tuttle is accelerating. One more thing before you comment. The total assets for Tuttle is now a mind blowing $286 million.

Net Assets

That’s about two months and 16 and they are closing in on taking in $300 million.

I can tell you that rate of funding, if it was in excess in February, this feels like the bearish equivalent of that.

Ian: Whoever is on the other side of that, whoever is making this trade happen, is basically Tuttle. It means they are in a long position but they are hedging that probably by shorting shares of ARKK or something like that. Somebody is driving up the short interest on ARKK.

That’s how the counterparty to this is hedging their side of the trade. Obviously Tuttle is not hedging theirs. That’s the whole point is that they want the opposite return of ARKK. The counterparty isn’t doing this because they want to go long ARKK.

They are going long ARKK overall and they are shorting as a hedge because they make the fees and that’s how they make their money. They are shorting ARKK and that’s contributing to the short interest. I think the short interest overall on ARKK is 14% or 15%.

That’s the highest I have ever seen on ARKK. A lot of the underlying shares now have 10-20% short interest. I think overall SARK is adding fuel to future short squeezes in ARKK and growth stocks. They have been contributing to the downside pressure on growth, but I think it will work in our benefit when it does start to get bought and these shorts have to cover.

Paul: The effect of SARK on ARKK starting in November is literally one for one. Then it really gets going in 2022 where SARK is up nearly in a straight line and ARKK gets destroyed. For sure this is a negative sign for that short fund. I think last week they were a few percent ahead.

Now they are 20% ahead in terms of performance relative to the underlying. There is a basis separation between ARKK performance. It should be not quite one for one, but it should be close. This is now a large variance between these two. It tells me the rubber band is stretching out.

It will at some point either break or just snap back hard.

Ian: I agree. The contributing factor to ARKK going back up is going to be short covering. That itself I think is going to drive a lot of demand.

Paul: I think this is where our readers and subscribers, many of whom have been tweeting at me and trolling me — it’s fine, I accept criticism and complaints. I think many of them think this is going to be a gradual process. I have seen a theme in the tweets.

“It’s going to take 3, 6, 10…” People continue to get more and more bearish and more negative on things. They keep extending how much the Federal Reserve is going to do, they think our stocks are going to go through another crash. The current valuations for our stocks are abnormal.

Robinhood reported today and it’s down 15% in the pre-market. Of course the headlines are that they lost all this money. They are a growth company, folks. It’s sales growth that matters. So into a horrific stock and option market they still grew their sales by 14%.

People are thinking this is going to unfold like molasses. I believe between the Tuttle money, the speed it’s coming in and this chart with the three stocks we discussed last IanCast: Zoom, DocuSign, Teladoc. This is a one-year chart. These are down 49%, 62% and 79%.

ZM, DOCU, TDOC

It’s a good indication of what our stocks have done since the peak. On the bottom panel is their revenue estimates for the current fiscal year. No one looking at this chart would ever think their sales were going up by 58%, 45% and 30%. That’s the sales growth.

That’s another point in the rubber band effect.

Let’s Talk About The New Innovation ETF!

The third one I want to point to is I guess what’s good for the goose is good for the gander. Is that still used? It’s an ancient saying I learned in India.

TARK

It turns out that someone has decided they are going to start a leveraged rebound bet fund on ARKK.

It’s going to have the ticker symbol TARK. It is going to be called the AXXS  Innovation ETF. It will target 200% of the performance of ARKK. Tuttle is going to have some equal and opposite competition on the other side. They are going to have a levered fund betting on ARKK to send it up.

I am guessing that levered fund is going to run ahead of that 200%. How is the 2X fund going to get its exposure? They are going to have to get exposure through options, some sort of swap contract. There’s going to be, as the money pours back in, some premium in there.

I think this rubber band is setting up to be a snap back rather than what I was thinking for a while which was that earnings would get announced and a number of companies would confirm they are growing. I think something more dramatic is setting up to happen.

Ian: All this stuff behind the scenes is going to contribute to a huge short-covering rally, which is going to spur demand. I think earnings are going to contribute to that as well. Whether it’s people buying once they see these companies are growing at extraordinary rates or they covering short positions.

It’s setting up for a huge rebound. Like we have said, I think the action earlier this year is setting up to be the best and most obvious buying opportunity in these stocks we have seen.

Paul: I think so. I am afraid to say anything because I am getting hit hard on Twitter and our YouTube comments. That’s all fair. I can tell you folks that it would seem obvious if you buy at lower prices or hold at lower prices then you get the benefit of the higher prices to come.

If the companies are growing, you can do this on any kind of beta test, if you are in companies long term that continue to grow, that have a long runway of growth, those stocks come back.

Ian: These companies aren’t going anywhere. Their growth isn’t going anywhere. Again, it’s just a matter of time before we see that rebound.

 

What’s Happening With Bitcoin?

Paul: Let’s go to crypto. Before I do that, I have to say I am still bullish, optimistic, positive. Yes, you can hate it. You can love it. You can think I am the dumbest human being on Earth. I accept all that. I will still say strong hands because of what I said before. Our companies are still growing.

Look at the stock price chart of any big winner over time. It has gone through crashes, corrections and where multiples collapsed. Yet, people have walked out on the other side with thousands of percent of return. The only folks who got it were the people who stayed in.

The people who jumped in and out persuaded themselves of some negative scenario and they end up never getting back in. That’s the experience. Look online. This has been well researched. People who get out almost never get back in. I am still BOP.

Love it or hate it, I will still to stay strong hands. Ian, now to crypto. There was a tweet from the president of El Salvador, Nayib Bukele, he said the same thing. I think he bought 410 Bitcoin (BTC) on behalf of El Salvador. He said it was pretty obvious you would buy at lower prices to get the benefit of higher prices.

What’s your view of what’s going on with BTC? I sent you this research that was presented by ARK Innovation at their [Big Ideas Summit]. They put out price targets for BTC of $1 million by 2030 and the more shocking one for me because I hadn’t thought that far, was $180,000 for Ethereum (ETH).

Talk to both of these.

Ian: With El Salvador I think they are going to keep averaging in as it gets lower, which is the smart thing to do because the upside is so massive. It’s amazing that we’re seeing an entire country buy the dip on BTC. I think we’ll see more of that this year.

I think several countries are going to make BTC legal tender or at least get the process going to do so. The prediction from Cathie Wood are really optimistic. I do believe BTC will hit $1 million. I wouldn’t’ be fully surprised if ETH hit $180,000 just because of the fact hardly anybody uses it at this point and it’s already valued at $300 billion.

That’s after it’s fallen more than 50%. I am bullish on both of them. With ETH especially, the number of institutions and people who are going to use these DeFi services, I think we’re still in the first inning with that. The upside is enormous for ETH. I don’t think they are going to go anywhere.

I think they’re going to be the dominant blockchain people work on. We’re seeing talent leave other big tech companies to go work on ETH. There is some prestige to the ETH brand at this point. From that perspective, from a consumer perspective and a fintech perspective, I think it’s set to have a huge move.

Paul: As I was reading that I thought, this is the way people will interpret it, “It’s 2030. I will come into it later. There’s plenty of time.” That’s really not the way markets work. I think what will be a fair way to understand it is markets will probably jump ahead, step back, jump ahead, step back.

I think by 2030 you could be at more than $1 million on BTC and track back. It’s not going to be a nice, straight line up. Instead it’s going to be a series of jumps and step backs like with what we’re experiencing with our stocks right now. We had a big jump in 2020 and now a massive step back.

Of course everyone wants to give up on the step back when that’s the time to sit through it. You don’t know. No one expected the recovery in 2020. No one can exactly know when it’s going to end, how it’s going to happen or at what speed. When prices are low we persuade ourselves of the most pessimistic points of view.

Ian: That’s why we always see BTC is dead or dying near the bottom. All those article start flooding out. It’s not going to happen. BTC has been through much worse than this and come back. Back in 2010 and 2011 when the Mt. Gox exchange went under, that’s where more than 80% of BTC trading happened.

Everyone lost pretty much everything. It still came back. It was super obscure back then. At this point you have so many people who are buying the dip and will continue to do so, I think the downside from here is limited. I think this year is going to be amazing for crypto.

Paul: I have seen in my tweet stream people tweeting and me and trolling me saying BTC is going to $18,000. That’s been a popular call. Then there is also a near meme-level of Twitter activity talking about how BTC is going to test $30,000. This is a deafening crescendo I hear on the internet.

Ian: I personally doubt that’s going to happen. If it does happen, I will probably keep buying more. That’s how I view it. I think usually when the consensus is around some number like that it doesn’t happen. I remember over the summer when it bounced off $30,000 everybody was calling for $20,000 like it was a certain event that’s going to happen.

Whenever there is a consensus like that, I am really hesitant to0 believe that’s going to happen. That’s just from seeing how markets work. I would lean toward no for $30,000 and definitely no for $18,000.

Paul: I am going to put myself out there as well and say I do not think BTC would go to $18,000. If it did, I am thinking that would be a great buying opportunity. I wouldn’t sell what I had. Would you sell? Would you be a buyer? Would you be a do-nothinger?

Ian: I would definitely be a buyer. Another aspect of that we are seeing a ton of fear around BTC is that MicroStrategy’s market cap is now 25% below what their BTC is worth. This is overflowing into the stock market. You can tell the fear for BTC and crypto is extremely high.

You would think MicroStrategy would at least be valued at the amount they hold in BTC. They have $4.6 billion in BTC and their market cap is $3.6 billion. That has never happened from what I have seen. That level of fear means we are actually close to the bottom.

Which Crypto Has the biggest leverage up?

Paul: It’s similar to what the discount is in GBTC, which I believe is at 30%. We’re going to end this with a question. If you had a choice and you could compare these three BTC exposures, which would have the biggest leverage up: BTC itself, Coinbase stock, GBTC or MicroStrategy?

Let’s say our bullish scenario works out and there’s a big move up. Which one responds with the highest percentage increase for someone in our timeframes of one to three years? Which one would give you the biggest bang for the buck?

Ian: I would say Coinbase, but it’s a toss up between them and MicroStrategy. With Coinbase, you have a huge business other than their BTC holdings. They don’t anywhere near as much as MicroStrategy, but they are going to add at a much faster rate. MicroStrategy is going to keep buying the dip for sure.

Overall, I would say Coinbase for that.

Paul: I am going to contradict you and say GBTC would. I think the SEC is going to be pushed into approving some BTC ETF. With that, the discount will go up. That is the largest BTC trust of any kind in the world. I forget how much BTC is sitting in GBTC.

Ian: They have more than 3% of the entire supply of BTC. They were a huge buyer at the end of 2020. That’s one of the big reasons we saw the price go up as much as it did. Them being out of the market has cooled off the buying pressure. When they get back in it will be another catalyst for demand and the price going back up.

Paul: I think this time around an ETF that got approved would mean multiple ETFs are going to have to be approved. That would mean a lot more demand pressure on BTC. One last thing, we have these wild predictions for BTC by June 30, 2022. This is your chance to capitulate and make it lower or extend it.

Do you still stand by your prediction?

Ian: I would say it’s more likely to see $350,000 by the end of the year, but it really depends on a lot of things. Either way, I would say a long-term approach for BTC is a good thing. I could see $350,000 by the end of June. I wouldn’t be totally caught off guard. I think it’s more likely by the end of the year.

Paul: I think back on my experience from 2020 when I said BTC would hit $50,000 and it wasn’t close for most of the year and then by early 2021 we were there. I am going to stick with my $250,000 by June 30. I am going to say that I think we are likely to get to those price target ARK laid out for BTC and ETH sooner than 2030.

I think that’s the longest date by which they happen.

Ian: Kind of like when Cathie Wood said $4,000 for Tesla before the split. Everybody thought that was crazy and it ended up happening within a year. I agree that both of those could happen much sooner.

Paul: We have covered what we need to this week. You get to say goodbye first and then I will wave everyone goodbye.

Ian: Everybody, thank you so much for watching. Have a great weekend, happy Friday and we will see you next week.

Paul: Try to stay strong hands. Be BOP. This is Paul saying bye.

Regards,

Ian Dyer

Ian Dyer

Editor, Crypto Flash Trader

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