What is this recent volatility telling investors? … six crypto CEOs make their case to politicians regarding regulation … bitcoin to $550,000?

 

This morning, we learned inflation surged 6.8% in November – higher than even the lofty forecast that experts predicted. It’s the fastest pace since 1982.

But rather than cratering, stocks are climbing as I write mid-afternoon. Of course, today’s gains – which could be erased by the closing bell for all we know – come after yesterday’s heavy losses.

Up and down, up and down…

If it feels to you like the market has been especially unsettled in recent days, it’s not your imagination.

The stock market has been more volatile during the last two weeks than it has at any other point during 2021.

That’s from our technical experts, John Jagerson and Wade Hansen, in their latest Strategic Trader update.

Below, you can see how this volatility has played out in the S&P.

In short, we went over a cliff beginning on Black Friday, only to stage a strong rally after the selling pressure faded.

The biggest drivers of the volatility have been fears of the new Omicron variant, a new, hawkish tone from Fed Chair Jerome Powell, and most recently, optimism about vaccine protection against Omicron.

Let’s jump to John and Wade:

So, what does all this tell us?

It confirms that Wall Street wants to be bullish on stocks but that it hates uncertainty.

***Why Wall Street wants to be bullish

Before we jump into more analysis, if you’re a newer Digest reader, John and Wade helm Strategic Trader. This is InvestorPlace’s premier trading service, combining options, insightful technical and fundamental analysis, and market history to trade the markets, whether they’re up, down, or sideways.

Back to their update for why Wall Street wants to be bullish on stocks:

First, it’s having a hard time finding decent yields anywhere else. The bond market certainly isn’t providing strong yields.

Just look at the charts of the 10-year Treasury Yield (TNX) and the 30-year Treasury Yield (TYX) below.

Figure 2 – Daily Chart of 10-year Treasury Yield (TNX)

Figure 3 – Daily Chart of 30-year Treasury Yield (TYX)

The TNX is only yielding 1.5%, and the TYX is yielding a shockingly low 1.9%.

If traders want yield right now, U.S. stocks are one of the only games in town.

For a bit more historical context, the chart below shows the yield of the 10-year Treasury dating back to 1980.

As you can see, we’re not too far above the yield’s all-time low, set in March of last year at 0.318%.

***What about the second piece of evidence suggesting Wall Street wants to be bullish?

Let’s return to John and Wade:

Wall Street is content with the earnings companies are generating.

The stocks in the S&P 500 continue to beat earnings expectations. All but two of the sectors in the S&P 500 (Utilities and Materials) saw more than 75% of their component stocks beat expectations.

Source: FactSet

Figure 4 – Q3 2021 Earnings Scorecard (source FactSet)

If the U.S. economy doesn’t have to shut down in any significant way due to COVID, analysts expect this earnings trend to continue.

On that note, there are two pieces of encouraging news. First, early studies suggest that a booster shot of existing vaccines is effective against Omicron.

From the BBC:

Pfizer and BioNTech have said a booster jab of their coronavirus vaccine promises to be an effective defense against the new Omicron variant.

Three doses provide a similar level of antibodies against Omicron to that of two doses against other variants, the companies said after a small study.

The World Health Organization (WHO) earlier said vaccines should still work against severe Omicron cases.

Second, there’s still no data suggesting that Omicron is deadlier than prior strains. In fact, it appears this variant spreads easier, but causes less serious cases.

The most recent data find that Omicron has been detected in at least 57 countries – yet according to the Centers for Disease Control and Prevention, there hasn’t been a single reported death linked directly to Omicron.

If further data support this takeaway, it would be decidedly bullish for stocks.

Returning to today’s market, how do John and Wade see this spate of recent volatility playing out?

Expectations are everything on Wall Street; if traders expect economic growth, stocks go up. If traders expect the economy to hit headwinds, stocks go down.

That’s why uncertainty is so difficult to deal with. It messes up expectations and leaves Wall Street directionless. Sometimes stocks drift higher when Wall Street is left scratching its head, but when the uncertainty is bearish – like it is anytime we’re discussing COVID – lack of direction typically leads to selloffs.

So long as the Omicron variant doesn’t prove to be more virulent, we expect good news like funding the Federal government, raising the debt ceiling, strong holiday spending, etc. to keep the S&P 500 consolidating within its longer-term up-trending channel.

***Meanwhile, crypto executives took part in key hearings in Congress earlier this week

On Wednesday, the CEOs of Coinbase, Circle, FTX, Bitfury, Paxos, and Stellar Development Foundation sat for nearly five hours before the House Financial Services Committee.

The goal was to turn Congress into a friend, not a foe, when it comes to crypto regulation. Specifically, that means signaling a willingness to have the crypto sector regulated by the government, but at the same time, treated as a unique asset class.

From Paxos CEO, Charles Cascarilla:

The solution is not to shoehorn digital asset operations into a regulatory system designed for earlier generations of financial assets.

Of course, the politicians had their concerns.

From Yahoo! Finance:

For their part, Lawmakers pressed the executives on what protections customers have…

There was also discussion about maintaining the dollar as the global reserve currency – a widening concern as digital coins surge in popularity and use – and how crypto could impact this.

So, what’s the practical takeaway from this hearing? Should we expect any meaningful momentum from the government?

Unfortunately, it appears more work is needed.

Back to Yahoo! Finance:

Judging by Wednesday’s hearing, there was little immediate resolution about how urgently policymakers will act, if at all.

“It is hard to see how this hearing creates momentum for legislation. The hearing did not create pressure on Congress to act immediately, Cowen analyst Jaret Seiberg said.

***Finally, while bitcoin continues to find footing, one marquee analyst expects monster gains in the coming years

As I write Friday morning, bitcoin trades around $48,215. That’s roughly 28% below its all-time high set about one month ago.

But if famed tech fund manager Cathie Wood is right, years from now, we’ll all be clamoring to buy not only at today’s price, but at the recent all-time high as well.

For any readers less familiar, Cathie Wood is the founder and CIO of Ark Invest. Its tech-themed ETFs produced enormous gains for investors before pressure on the tech sector this year dragged prices back to earth.

As to Cathie’s thoughts on bitcoin, here’s Markets Insider:

The price of bitcoin could surge to more than $500,000 as institutional investors begin to allocate to the relatively new cryptocurrency space, Ark Invest’s Cathie Wood told CNBC in an interview on Thursday.

Wood explained that institutions are always in search of investments that are uncorrelated to traditional asset classes like stocks and bonds, and crypto fits that bill.

“I think institutions are moving in [to crypto] right now,” Wood said, adding that they currently prefer the two largest cryptocurrencies, bitcoin and ether. As a whole, according to Wood, institutions barely have any exposure to the space…

If institutions moved roughly 5% of their portfolio to bitcoin over time, Wood believes it would add $500,000 to the current price of bitcoin, to about $550,000 based on bitcoin’s current price. That represents potential upside of 1,000% from current levels.

Whether or not this plays out, we remain steadfastly bullish on the crypto sector this decade. If you’re looking for help in how to add altcoins to your portfolio, click here for more from Luke Lango and his Ultimate Crypto service.

Just two weeks ago, at the same time bitcoin was falling to its recent lows, Luke recommended his subscribers lock in profits on an altcoin to the tune of 850%. I should mention they’d only held this specific coin in the portfolio since April.

We’ll keep you up to speed on bitcoin and the broader altcoin sector here in the Digest.

Have a good evening,

Jeff Remsburg