by Ivan Martchev

December 28, 2021

Bitcoin does not trade as an anti-inflation asset (with inflation running at 40-year highs), but as a high-beta “stock” that has no earnings. It is my experience that most individual investors that bought bitcoin didn’t buy it to transact in it but because it was going up. It stands to reason that if they bought it because it was going up, they may sell it if it starts going down too sharply.

As such, bitcoin has a serious correlation with the Ark Innovation Fund (ARKK), the actively managed ETF that is famous for holding “story” stocks with little or no earnings.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Both bitcoin and ARKK have “dead-cat-bounced” at the end of 2021 – as it is customary to see a rally at year-end on light volume when computers tend to take over the trading of stocks. No one can predict news and major geopolitical developments with any precision ahead of time, but in the holiday season there are few major surprises, so we could see more upside at the end of 2021 during a “Santa rally.”

Still, ARKK looks quite a bit more ominous than bitcoin. It has started to make lower lows and lower highs and has penetrated all kinds of moving averages lower, including the more important 50- and 200-day moving averages. It has become a “sell the rallies” trading vehicle, where the air from the multiple bubble positions that ARKK holds is now coming out.

I don’t believe that the recent December low for ARKK ($89.03) will hold, and we will see it somewhere in the $70s when the Fed monetary tightening gets going in earnest. (It closed last Friday at $99.07).

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

With such a correlation to high beta assets, can bitcoin rally? Anything is possible, but I do not believe it is probable. Bitcoin, to be fair, has not broken down as much as ARKK. It held the recent December low – which was in the vicinity of its rising 200-day moving average. This makes its December low extremely important, and that point may serve as a signal for acceleration of the selling when it is breached in the first quarter of 2022, when the Fed gets going in earnest with their monetary tightening.

The Broad Market Sees the Glass Half Full for 2022

I sure hope that Omicron is the last hurrah for COVID with its less lethal but more contagious nature. If that turns out to be the case and the economy keeps normalizing after the dreaded 4th COVID wave, both economic growth and earnings growth will be good. Keep in mind that every COVID wave has had less and less impact on the economy so far. Omicron should be no different.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Still, this WWII-type deficit spending as well as Fed support did push asset prices into the stratosphere. If there is less deficit spending and less Fed support, valuations should normalize. I will round the numbers for the sake of simplicity: the five-year forward P/E is around 18.5 while the 10-year forward P/E for the S&P 500 is a little above 16.5. With the forward P/E for near 21, we are, shall we say, richly valued.

While EPS growth right now is estimated to be up around 10% in 2022, the nature of valuation compression, or normalization in this case, is that the stock market appreciates less than EPS growth. If EPS growth for the index turns out to be as high as 15%, the stock market should be up 5% to 10%.

In a slowing EPS growth environment, picking stocks with above average earnings growth and normal valuations could lead to some serious outperformance. In this environment, ripe for Fed intervention, pure indexing is unlikely to work well, while targeted stock picking should produce superior results.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Please see important disclosures below.

About The Author

Ivan Martchev
INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

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