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Stock Market Overview Including MicroStrategy & Bitcoin Margin Call Risk

Updated: May 9, 2022

Stock Market Failed Fed Day Rally

Because the market's been straight down the rally on Fed day last Wednesday didn't help the market break out topside. I said that day and next (to subscribers) that I wanted to stay bearish because the market was still pointing down. The next day the market gave back all that bounce and broke down. That was a big failure. The market's been seeing failures all year, sucking in buy-dippers to then drop a little lower.

Fed Tightening More Aggressive Than What Caused The Stock Market Launch

The Fed meeting and commentary last week was clearly bearish but Fed days over history have shown up markets.

The Fed is now unwinding all that stock-market goodness that forced a launch of markets in the face of initial pandemic global economic fears.

They are now reversing that ease and tightening at a faster pace. Their getting out is going to be more extreme than their getting in.

They plan to get to $100b per month in balance sheet cuts. That compares to building their balance sheet at $80b per month when they wanted the market up. We saw what $80b did to markets. Imagine what $100b will do going the other way.

We've been saying since last year that there's going to be a 'slam-on-the-brakes' moment for the Fed to reverse all that goodness. I think we're here. In fact Fed officials are hinting they need to do more than they've been saying with hints of getting rates up to 2.5-3.5% quickly.

The Fed's goal over time is to control markets. It's their only tool to control and guide the economy. Now because of inflation they want the economy to slow to get inflation back under control. To do that they need the market down. Fed Chair Powell is hoping his tough talk will guide markets lower.

MicroStrategy Asked About Bitcoin & Crypto Margin Calls

One potential shoe to drop is crypto. MicroStrategy (NASDAQ:MSTR) was asked on their earnings conference call last week at what price they'd need to get a margin call. They said $21,000. As we know Bitcoin and crypto trades fast. How many days of trading does Bitcoin need to get there. Uh, not many.

Crypto is also traded heavily on margin. When markets go down traders using margin are forced to sell. While were not at $21,000 for Bitcoin yet, the question to MSTR was a headsup to the world about where Bitcoin and markets stand.

I'm surprised that most crypto investors haven't yet viewed crypto as a macro trading instrument that's heavily affected by Fed decisions. Like gold with zero coupon, Bitcoin is a hedge against inflation. The Fed's bold moves to stamp out inflation is a direct target to any asset that benefits from prices rising, like crypto.

I would presume that most crypto investors are unaware of the connection to the Fed and probably would consider buying more on the way down, like MSTR said they plan.

The Fed's moves are extreme. They were extreme to get markets up during the pandemic and they are more extreme to get markets down now that they helped spur on inflation.

If margin calls happen to every-day investors and newbies, they are forced to sell and they may want to sell their other investments as well like stocks along the way.

A 'blindside' Fed move on crypto can potentially shake confidence of smaller investors and force mass selling.

If MicroStrategy has the risk to be out over their skis on a 'normal' Bitcoin drop you can expect that many many more investors would also be at risk that followed MSTR in.

Is China Following Russia? That Would Kill Tech Stocks

We need to watch China. Russia tip-toed around Ukraine initially with drills. China appears to be doing something similar (here).

I told subscribers that after the US exit of Afghanistan last year the world was now 'up for grabs.' US has shown weakness and anything can happen.

China recently met with their banks apparently to sanction-proof their system (here). They may be planning to either help Russia or move on Taiwan. Either way they may be concerned that whatever they are planning would cause a reaction of sanctions from "The West."

These sanctions would probably kill tech stocks that have so much exposure in China. That would then probably crush markets. Imagine if Apple and others had big exposure in Russia, where would those stocks be right now? Well if China invites the West to sanction them, that's what QQQ, The NASDAQ, and markets face. This needs to be watched.

Economic Reports Affect Stock Market

Non-farm payrolls and wages came in about inline last week. It doesn't matter so much because Fed Chair Powell said last week that one set of data points would not change their plans to aggressively tighten.

CPI reports on Wednesday. Fed President James Bullard said, "If inflation expectations go higher, it's going to be very difficult to control inflation in the U.S."

Uh, that does not sound so safe. Inflation numbers better not show upside.

If Bullard is right then the Fed would have to ratchet up further their tightening efforts. Which way would markets (crypto and stocks) react?

Conclusion: Follow Direction

I try to keep things simple. Crashes are generally predicted by down action. We don't need to predict a crash, we need to continue to follow market direction.

All investments have many risks and can lose principal in the short and long term. The information provided is for information purposes only and can be wrong. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Elazar Advisors, LLC, and their related parties harmless. All model portfolio trades are hypothetical to show direction, conviction and timing. Model portfolio performance excludes all relevant transaction costs. Opinions given are at this moment and can change rapidly after this is published. If our calls are made public (outside the service) we may or may not update our opinions publicly. Elazar and its employees may take positions in the direction of the calls made in the service but also may add to or exit those positions at any time after this is published. We are currently short BITO, TLT, GLD.

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