Too Much Pessimism Among Investors

Chart of the Week

In a weekly survey, the organization with over one million members measures overall market sentiment. Three weeks ago, optimistic investors were clearly in the majority (42%), but in the current week, pessimists have now taken a clear lead with 42%. This marks one of the strongest and fastest increases in investors expecting falling markets in years.

Why This Matters:

The new Omicron variant of the coronavirus is triggering panic. However, this appears to be exaggerated. When most investors have already sold, only a few positive developments are needed to push the market higher again.

Stock markets in a rising interest rate environment

The central bank in the United States began reducing its bond purchases a few weeks ago. So far, the markets have handled this well. At the current pace, the first interest rate hike is expected around mid-2021. How will stock markets react when the first rate hike arrives?

The chart shows the average performance of stock markets one year before the first interest rate hike and two years afterward.

If this analysis is to be believed, we can still expect rising markets for now. Markets tend to decline only after the first interest rate hike in the economic cycle. However, much depends on how quickly this happens. Current statements from central banks suggest a gradual rate-hiking cycle, which would be manageable for the markets. But if central banks raise rates at a rapid pace, stock markets would likely decline significantly.

Bitcoin: From Whales and Fish

The crypto market is unregulated and offers no investor protection. It promises high returns without a safety net—the Wild West for investors. That is likely exactly what makes it so appealing for many investors to try their luck there.

A Bitcoin whale refers to individuals or entities that hold large amounts of Bitcoin. Whales own enough cryptocurrency to potentially influence market prices. Investors with more than 1,000 Bitcoins (60 million USD) are called whales, while those with more than 100 Bitcoins (6 million USD) are referred to as fish.

In crypto markets, manipulation occurs daily, and whales act ruthlessly to generate profits. In regulated markets such as stocks and bonds, most of these activities would be illegal—but not here. That is why whale activity plays such an important role. The safest way not to get eaten is to swim behind the whales and fish.

Tips for whale watching

People always say that the crypto market is completely anonymous. While that’s true, it’s also more transparent than any other market. Every Bitcoin can be traced back to exactly who owned it and when. For example, we know that the largest user, with the address 1P5ZEDWTKTFGxQjZphgWPQUpe554WKDfHQ, currently owns 115,315 Bitcoins (6.5 billion USD). There are databases online that show exactly which users own how many Bitcoins, and whether they are buying or selling. What we don't know, however, is who is behind the username.

That's why it's quite easy to closely track the activities of the largest crypto holders:

At all the blue points, the whales sold. This is a clear signal to sell as well. At all the orange and red points, the whales bought. As soon as the whales started buying, a major rally was on the horizon. On December 1, the first red point appeared after a long blue phase. However, there are other ways to identify whales.

To do this, you need to understand how they trade. As in a normal market, there are people who want to sell Bitcoins (for example, 5 units for 56,900 and 10 units for 57,000) and people who want to buy (for example, 8 units for 56,800 and 2 units for 56,700). A typical order book on a marketplace looks like this:

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Let's assume that a whale now expects prices to rise sharply and wants to buy an additional 50 bitcoins. He has two options:

• He places a buy order to purchase 50 bitcoins at the best available price. So he first buys 5 bitcoins at 56,900, then 10 at 57,000, then 13 at 57,100, and so on, until he has 50 bitcoins. In technical terms, this is called “sweeping the order book upward.” He pays an average price of 57,124 per Bitcoin.
• He sees the large buy volume at 56,200. He now sells 50 Bitcoins and sweeps the order book downward. He does this through short selling. So he sells Bitcoins he doesn’t have, thereby pushing the price down to 56,200. Then the whale places a buy order for 100. This closes the position of the 50 Bitcoins he shorted, and he now holds the 50 Bitcoins he intended to buy. This sequence of orders takes place in a matter of seconds. His purchase price for 50 Bitcoins is 56,200, and through the short-term short sale, he has made a profit of 17,900 USD.

Compared to the first scenario, the whale bought at a 3% lower price in the second scenario and also made a profit of $17,900. The transaction is very negative for all small investors who had placed stop-loss orders at 56,600 and 56,500 to limit their losses. They are forced out of the market at a poor price, and the price then quickly shoots up.

Such price movements triggered by whales can be observed:

The chart shows the price movement of the cryptocurrency Ether over the past 8 days on a 5-minute chart. The circles mark instances of apparent whale activity. It is easy to see that these always occur precisely at short-term highs or lows. This can be effectively leveraged for short-term trading.

Disclaimer:

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