When Congress held hearings on the Gamestop debacle their sole concern was that brokers had blocked access to the pump and dump. They had no interest in the fact that every major retail broker was taken offline by the massive volumes. Of course that event caused an even greater rush of newbie investors into the casino. When the Nasdaq peaked and crashed in February, the down volume made last year look like a picnic. You don’t have to be a genius to predict what’s coming, but you do have to be able to fog a mirror.
We see via the IMX (lower pane) above that the decline off of the head of the head and shoulders top, got bought with both hands. And we now know that the most popular stocks were Tech stocks. However, one must ask what happens to down volume in this next decline?
It will be cataclysmic.
Two weeks ago, several institutional brokers (Morgan, Goldman, Credit Suisse, Nomura) fought each other to dump stock from a single shared hedge fund client "Archegos", at any cost. They liquidated all of the holdings at any price to raise cash.
Now picture what happens when that liquidation process is repeated a hundred times over. This time around massively levered Robinhood newbies will be pitted against hedge fund managers who are on their way to new careers bagging groceries. One thing they have in common, they all over-own the largest mega cap Tech stocks.
Another trade that got very crowded recently is the Yen carry trade. In times of financial turmoil, the Japanese Yen is viewed as a safe haven. However we just learned that hedge funds are shorting Yen at a two year high. They are extremely confident the one year+ RISK ON party is only getting started:
And yet we see here that dollar/Yen is extremely overbought and is already rolling over deja vu of February 2020:
Many people are of the belief that Bitcoin is the new safe haven. Safer than gold. Which is why it's now the most crowded trade on Wall Street:
"Inflows into cryptocurrency funds and products hit a record $4.5 billion in the first quarter, suggesting increased institutional participation in the once-maligned sector"
When they say that the dumb money comes in at the top, in this case the dumb money are the hedge funds, which waited until it was up 1,000% off of the 2020 lows to finally go ALL IN.
Ever heard of a blockchain death spiral?
Bitcoin evangelists will claim that it's a purely hypothetical event, however it has almost happened several times already. The idea is that if the price of Bitcoin crashes below the cost of mining each Bitcoin, then miners will leave the network en masse and the overall network will grind to a halt. Meaning anyone who owns Bitcoins can't sell them. Regardless of whether or not an outright network halt occurs, the congestion on the network could increase to a point at which there is no liquidity and hence no way to get out. Back in 2018, when Bitcoin crashed, the transaction fee to buy and sell a single Bitcoin reached a ludicrous $34. In other words, Bitcoin liquidity dries up when it is needed the most. When sales transaction volumes spike, miners leave the network.
This inherently unstable Bitcoin design is somewhat similar to high frequency trading in the stock market. Both HFT and momentum (CTA) algos remove liquidity when volatility explodes, because they are programmed to reduce leverage based upon the level of volatility. Which is why flash crashes are so common in today's market. There is no one on the other side of the trade.
It's called volatility targeting and it's a disaster waiting to happen.
Which gets us to the chart of the day: This week so far has seen the lowest market volatility since the February 2020 top.
A Bollinger band squeeze is an explosive volatility event that takes place when volatility reaches a new six month low.
"While it can be a real challenge to forecast future prices and price cycles, volatility changes and cycles are relatively easy to identify. This is because equities alternate between periods of low volatility and high volatility—much like the calm before the storm and the inevitable activity afterward."
Indeed.
In summary, Robinhood/Reddit gamblers and hedge funds are all massively leveraged to the exact same Tech stocks and Bitcoins. The recent low volatility has created a feedback loop of ever-increasing complacency and leverage. Global gamblers have not even the slightest clue what is coming.
When the global Nasdaq was at this level of decline one year ago, we see that bearish sentiment was much higher than it is today:
Due to central bank sponsored moral hazard, gamblers have now onboarded a lethal level of risk.
Bitcoins, Treasury shorts, Yen Carry trades, Tech stonks, Biotechs, they are all the same trade now called "RISK ON". And it won't matter which asset class crashes first, because they are now all 100% correlated via margin calls. Margin clerks generally sell the strongest assets first. Which means that if they can't sell Bitcoins, they will sell Apple instead.
