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Seasonal Trends: Market Noise?

Posted by Dan Weiskopf, ETF Professor on May 5, 2021 10:30:00 AM
Dan Weiskopf, ETF Professor
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If there is seasonality to markets, what is an investor supposed to do? We all know to never expect to earn profits in a linear fashion. Looking at just the left side of the rainbow does not address the reality that sometimes, dramatic drawdowns make the dream of a retirement treasure chest seem out of reach. True HODLER will be tested during these periods, similar to how FAANG skepticism tested long term stockholders. In addition, Wall Street loves catch-all phrases like “Sell in May and Go Away,” so it should not be a surprise that today we now have the saying, “AltCoin Season.” We address this issue this week to encourage investors to remain vigilant in accessing their own risk profile. Stealing a Michael Gayed saying, “diversification is about owning things that are failing when everything else is working, so that when everything else is failing, you have something that is working.” We are in unchartered waters in fixed income and in almost all asset classes near new highs: equities, crypto and even certain commodities such as lumber, corn and wheat. Is this just because investors are concerned about inflation? Again, Mr. Gayed – “conditions and strategies need to be monitored.” While cash seems like trash right now, in a major drawdown where liquidity sinks all rising boats, cash will remain stable and spendable. Alternatively, to balance out your strategies look to investment choices that have underperformed and have a high negative correlation, or can tactically switch during liquidity crises.  

The Crypto Rainbow

At Toroso, we focus on risk, and believe returns will follow. Therefore, sizing exposures and a systematic approach to rebalancing is always recommended. For many this statement may sound obvious, but way too often we read (Twitter) or hear (Clubhouse) extreme chatter or even rants about singular beliefs, and a lack of appreciation about the benefits of diversification. Funny thing though – as ETF Nerds over the past 15-20 years, we have grown to embrace the openness of millions of people generously exchanging information and research as a component of our dynamic core research process. In this week’s report, we highlight an image of a rainbow from the website BlockchainCenter.net, which clearly illustrates how there has been a pattern of seasonality to the Altcoin phenomenon versus Bitcoin. Just look at Q1 2014 and Q1 2018, but note that currently we would seem a long way off according to this rainbow image from FOMO. Probably hard to believe for some, but things could get stretched out based upon momentum in this accelerating rate of adoption. Again, “few may understand this, but conditions may be changing.”

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What is Altcoin Seasonality?

According to a Voyager Blog Post, Bitcoin, at its peak of dominance, represented 69% market share of all crypto; today it is just below 50%. Let’s be clear – the definition of “AltCoins” is anything but Bitcoin, which includes Ethereum and yes, Dogecoin. Most importantly, we highlight the seasonality not as a recommendation, but because we may be discussing this phenomenon with our guest speaker Steve Ehrlich during our Virtual Happy Hour this Thursday. Steve is the CEO of Voyager Digital, a technology platform in successful competition with Coinbase. Recently, the Voyager BLOG highlighted this trend which, by itself, only means that investors may be diversifying into other areas of the crypto market. This could be a seasonal short-term trend, or a sign of confidence broadening out in this new market. Funny thing – when breadth broadens, in US stock market terms, it usually is a sign of another leg higher. You can see this in the below Bloomberg chart which reflects massive optimism across US Equity markets. Admittedly, these past 12 months basically catch the bulk of performance from when the Fed backstopped the market. For reference purposes, it is remarkable to think that the S&P 500 return from the bottom is a whopping 90%. Nevertheless, for those who eased in 5 weeks later on April 30th to today did just fine at about 50%. Our point – a little buffer, cash or alternatives should be embedded in every portfolio.

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Bottom Line Message

If you want to play seasonal trends, go for it. However, move incrementally, knowing these are trades with binary outcomes. Market timing is a tactical trading strategy, and the evidence about “Sell in May and Go Away” seems to be less credible according to data reported in a recent Kiplinger article, titled “Sell In May And Go Away? Here We Go Again…” Nevertheless, we do believe that a robust review of portfolio risk makes sense. Simply ask yourself – if the portfolio was down 25% could I and would I be a buyer of what I own? Similar to speculating on small caps, it does not surprise us that there is seasonality in AltCoins speculation at this stage of the rally. The question, however, remains: how much risk should be taken with the retirement treasure chest? Bear markets come fast! Be diversified, and remember to own something that provides you a cushion. The “Bear” is not always soft and cuddly!

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