Bitcoin Rebounds Instead of Collapsing, and That's Impressive

 | Dec 27, 2017 | 9:30 AM EST
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"Fragility is the quality of things that are vulnerable to volatility." -- Nassim Nicholas Taleb

The Cyclone

Coney Island in summertime. I end up there at least a couple of times a year. Beluga whales at The New York Aquarium. An entertaining walk on the crowded boardwalk. A delicious lunch at the original Nathan's Famous. Oh, and for the truly adventurous, there is the chance to take a ride on the 90-year-old wooden Coney Island Cyclone -- possibly the world's most famous roller coaster. Don't live near New York? Oh, there are still plenty of thrill rides available for all. In fact, I've been watching one trade from the cheap seats for most of the morning.

Bitcoin has cooled sharply since trading at $16,472 just after midnight Wednesday morning. The volatile cryptocurrency hit a low, from what I can see, of $11,230 on Friday morning. That's an increase of nearly 47% in just a couple of days. That increase came just after a 40% declines stretching from bitcoin's peak at $18,840 last Monday to where it bottomed out at on Friday. Last sale? $15,753 as I type. Will be different, maybe drastically so, when you read. What do I make of this?

What has become plain to me that there is no drying up of enthusiasm among non-financial types. At family parties, out with friends, social media groups, this is what people who know you are employed in the world of finance ask you about. From a trader's perspective, I was curious to see what would happen upon the first truly significant selloff after this crypto had gone parabolic in mid-November. I have not been a believer, but I don't judge motive, and I do not judge (though I try to) valuation. I do judge the action at the point(s) of sale. You know what? When that selloff came, the buy side did, in fact, show up.

To me, that's impressive. Now, I have heard stories of manipulation. Differing last sales, even of rejections of orders on the sell side at various exchanges. I do not know how much of this is true, but I do know that this product had an opportunity to collapse, and rebounded instead.

Last week, the Israeli Securities Agency made it known that firms trading in bitcoin could not operate on the Tel Aviv Stock Exchange. The Agency wants to investigate how to regulate cryptocurrencies due to volatility concerns. In China, the government went about banning Initial Coin Offerings in September, and closed several exchanges. Here in the United States, the Financial Industry Regulatory Agency (FINRA) has warned those investing to use caution "when considering the purchase of shares of companies that tout the potential of high returns associated with cryptocurrency-related activities." Central banks have made mention of starting their own version, or seeking ways to regulate this growing financial arena. None of that has seemed to matter all that much.

One negative does strike me. The thought had been that the initiation of bitcoin futures trading would bring stabilization to the price of the underlying product. The action over the past 10 days or so tells a different story. The product remains wildly volatile, but the undeniable truth is that there is support. Will I buy some soon? Not yet, but I am willing to consider that there might be a point where and when I would. I would still rather have physical gold, clean water, and ammunition on the day of the zombie apocalypse. Until then, though ...

Retail Roars

Retail stocks were the champs on Tuesday. As we all saw in Tuesday's pre-opening news, MasterCard SpendingPulse reported that U.S. retail sales had seen a 4.9% rise year over year for the period covering Nov. 1 to Dec. 24. E-commerce, which of late has accounted for roughly 10% of overall retail sales but may come in a bit higher as late 2017 data continue to stroll in, saw a rockin' 18.1% year-over-year increase. Huzzah. Was there bad news for anyone? Sure, there was the Apple (AAPL) news, but that's a different tale -- though support did hold all day there.

The joyful news for the retailers sent Sarge fave Kohl's (KSS) soaring nearly 6%. Among traditional brick and mortar retailers, Macy's (M) , Footlocker (FL) , Signet (SIG) and Nordstrom (JWN) also came along for the ride. The SPDR S&P Retail ETF (XRT) scored a gain of 1.12% for the day. Are these guys out of the woods? Consumer confidence is still running at something close to millennial highs. Unemployment continues to run at extremely low levels. Wage growth must be just around the corner, right? The Phillips Curve will save us all. No?

My gut instinct is that the U.S. consumer has been unleashed. This was a great season, no doubt. My gut also tells me that consumer behavior has changed forever, and old guys like me who actually get in their vehicle, and drive from store to store to buy holiday gifts for their loved ones are not being replaced as quickly as we are dying off. Know what I mean?

There will always be, in my opinion, a place for brick-and-mortar retail at the specialty level. Emergency home repairs will require a quick trip to stores like Home Depot (HD)  or Lowe's (LOW) , but even those types of retailers are evolving toward the Net. For planned projects, it's a whole lot easier to have 45 80-pound bags of concrete delivered to your driveway than to get them to your vehicle in the parking lot and then get them home.

There will be a continued hollowing out of the industry. Square footage of retail space per potential customer will continue to decline. As it does, those who survive will be those who mesh the two arenas in the best way. That is why I will continue to tout both Walmart Stores  (WMT) and Kohl's for the way that they have tackled the Amazon (AMZN) problem. By, the way, I am long all three.

I like WMT for its confrontational, "take no prisoners" style. I like KSS for the way it has played ball with the slayer of businesses. That does not mean that I will not look to lighten up on my KSS after such a run. The stock is up 25% this month, and is one of my best trades of 2017. I am, after all, a trader. I do not fall in love. Beware, though, that the name still pays a 3.87% dividend yield, even at these prices. It just paid that dividend last week, so if you do play around, you have until March to get back in. Got it?

They Keep Telling Us

Have you noticed that they keep telling us that the U.S. dollar is poised to rise in value versus the competition? Now, they tell us that the repatriation of $400 billion worth of cash stashed overseas will boost the greenback. (What happened to trillions? Never mind). So, they tell us that more dollars in circulation will increase the value of the dollar. Hmmm. I would not bet the farm on this. Someone also forgot to tell professional currency traders, as the U.S. Dollar Index is working its way back towards the bottom of its three-month range.

I know, I know, rising rates will support the dollar. They would, you're not wrong -- if the planet was not starting to expect the tightening of monetary policy to expand from the Federal Reserve to Europe, and maybe even Japan (someday). As the world economy continues to grow, so will demand for dollar-denominated commodities. That's actually a better point. However, increased fiscal spending at a deficit -- that should be inflationary, right?

My thought is that the U.S. dollar will not be as strong as many think going forward. You may see spurts of strength here and there, but the current U.S. administration has made clear that it favors conditions conducive to manufacturing and exporting enough to ease negative trade balances. That means pressure on a new Fed Chair to slow the tightening process, especially if foreign central banks balk. Stay tuned here. This matters.

Chart of the Day: SPX vs. XRT vs. KSS, M, WMT

This year-to-date chart perfectly illustrates the outperformance of Kohl's, especially from mid-November on. It also shows how quickly the rest of the sector, even Macy's (-25% ytd) has gained on the broader equity market since that time. Time to trim profits in the space? That's your decision. I will be.

Sarge's Trading Levels

These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.

SPX: 2702, 2694, 2685, 2678, 2672, 2664
RUT: 1569, 1562, 1551, 1542, 1535, 1529

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