🗞 Rhyming History

WHILE YOU POUR THE JOE… ☕️
Buttcoin

After we told you Bitcoin was going to make new all-time highs after its dip down to $84,000, we are now telling you that the party might be over.

Might

The reason is that the same signals that led us to buy Bitcoin at $84,000 are now telling us to sell it as of Friday last week when the price was roughly $99,200 for a minute. 📉 

What those reasons are will become apparent in just a second, but know this:

Bitcoin is now widely accepted by Wall Street and other big investors, so it is part of the bigger machine and has to act like any other cog. So when asset classes like commodities or bonds say something, Bitcoin has to follow.

Speaking of asset classes, let’s get on with today’s email 📧…

ROTATION
Heat Waves

The weekly issue we pay the most attention to is the commitment of traders report, other than the monthly PMI indexes.

Not a lot of retail investors know about it, but it is the most critical gauge when you’re looking to measure where the big money is headed to lately. If you figure out where and why the dealer is playing, you can piggyback on it.

First of all, let’s define what you’re about to see right now: 👀 

1. Commercial Dealers: These are the constituents in the report that are represented by the big issuers of securities and the ones that hold most of the inventory, the banks and prime brokers.

2. Non-Commercials: These are the smaller guys, wealthy individuals, pension funds, hedge funds, and the so-called smart money.

We like to think about these two because the commercials are like the car manufacturer, so think of Toyota’s factory in Japan. Then, non-commercials would be more like the local dealerships in your city.

If you drive around the dealership and see a lot of inventory, you get the feeling that things are good, right? Business and demand are strong for cars, and vice versa on an empty lot.

However, the accurate information is at the factory! If Toyota in Japan is getting rid of all their inventory and making less and less each quarter, it means that they expect demand to fall significantly in the coming months, even if the local dealer is full of it.

Local dealers (non-commercials) are chasing momentum, but always get trapped on the wrong side of inventory, so you want to check for the commercials here.

S&P 500

Starting with the S&P 500, you can see that the commercials (red line) have been dumping their index positions all year and are now as short as they have been since 2007. 📉 

Whether they know or expect something to happen to the S&P is up to debate, but if you’ve been following us for a bit, then you know that the theme has been shifting back and forth between hyperinflation and a potential recession.

Warren Buffett and Goldman Sachs analysts are indirectly calling for a lost decade in the market, so we think the S&P's overvaluations (30x P/E) might come down significantly, which explains the commercial players' net short inventory.

But that’s only one side of the story. It’s time we checked what the big money is doing in other markets so we can come up with a broader theme.

10-Year Bonds

No need to go too far out for these; all you need to see is the uptick last week in bond holdings. Now, here’s what that means:

As the price action in bonds and other assets told us that the inflation theme would be back on, you see that the commercials started dumping bond holdings since yields would come up to reflect inflation comebacks.

Now that the price action has led us into a recession theme, it makes sense to see these commercials buying back into bonds, since lower yields will be the likely outcome in financial troubles.

So far, the story is taking on traction. ✅ 

Small Cap Stocks

The story makes more sense here, and the $IWM ETF represents small caps through the Russell 2000 Index. Domestic small businesses don’t have the ability larger businesses have (through international exposure) to diversify away costs and slowdowns. 📉 

So, you can see that out of all the trends, and even though a recent rally, commercials have held and increased their short positions in small-cap stocks.

Whether we get an inflation or recession theme, small-cap stocks will be the ones to take most of the heat due to the fundamental setups they carry.

And the big money is telling you so. 🫰 

 TRADE OF THE WEEK
Two Legs, One Spread

Here’s the thing: If we are really going to move away from an inflation theme and down into recession, then the price of gold will probably give back some of its recent gains. 📉 

We gave you gold when it was around $2,640 as a buy, considering all other markets (bonds and small caps) were signaling inflation.

But

As the tide has shifted to recession, we think that $2,700 to $2,720 gold might see some headwinds, so we’re not only taking profits but also looking to go short.

However, that’s a bit premature because what if the market suddenly shifts the other way and reignites the inflation rally?

That’s where the concept of hedging comes into play ⚖️, take an opposing position and diversify away your exposure.

So we want to buy silver, and here’s why:

These are the running correlations between gold and silver for the past quarter, and as you can see, we are now at a high level in the range.

That means the two precious metals, now sharing nearly 98% correlations, should be trading very tightly to each other.

But

That’s not the case, as gold has significantly outperformed silver in the past few weeks, giving us the opening we need.

This is the spread between silver and gold (price of silver minus price of gold). As you can see, the spread has deviated below its mean and is headed toward a key deviation level.

Last time we hit this level, we pitched the same trade to you, we took the options side of it and made a pretty hefty 300% return 🔥 on the spread.

The question is: How much silver should I buy, and how much gold should I short to be appropriately hedged here?

This ratio, where you short 0.11 shares of $GLD for every one you buy in $SLV, will keep the position hedged on a delta basis against the S&P 500.

It also makes sure that you stay stationary, which is fancy for saying there’s a mathematical probability that the spread will come back to its mean from today’s deviation.

See you soon when we take profits on this spread. ⏳️ 

NOW GO AND MAKE IT HAPPEN
Life Lessons

An associate and I were out for a meeting last week when we ran into an old friend who casually imparted some of the best wisdom (which I needed without knowing) to us.

Before he left to continue his day, he recommended we read a book that had been accumulating dust in my library since I last read it a few years ago. I think it deserves another read.

Today’s book recommendation 📖 is filled with lessons from Charlie Munger (rest his soul), who has nearly 100 years of experience, from WWII to building one of the most successful firms in the world alongside Warren Buffett.

To your success,

G. 🥃