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12:00 TUESDAY – Stock Market Report

Updated: Jan 30, 2021

by Robert Holman | The Defensive Advisor | January 27, 2021


MARKET BULLISH … Rating of 6 (0 - 4 is bearish, 5 is neutral, 6 - 10 is bullish). My biggest investor concern is a new one - speculation (covering and buying) on marginal stocks, those previously with a high level of short selling. That is the only reason why I’ve backed down one notch on the market rating.


I was unable to publish on Tuesday, and yesterday was too volatile, as the price action was a “first” of its kind, and that really needed my full attention as events unraveled.


For the following discussion, it is not necessary to understand the mechanics of short selling – understanding the net impact(s), as expressed herein, is all that matters.


Covering of short sales positions drove the market down yesterday. Some stocks had been sold short in excess of 100%. The short position in GME was said to be more than 140%, and the price rose from $40 to near $380 over a 4-day period, as there was a scramble to find shares to purchase to cover the short. As a retail client, you must first be able to borrow shares from someone before you can sell short. This means that it would be impossible for a stock to be more than 100% short if only retail investors could buy and sell. Obviously, the same rules do not apply to hedge funds or institutional investors, or the rules are not being followed, for stocks to reach these excessive short levels. I’m certain that this will lead to a response by regulatory authorities to prevent this excessive selling from ever happening again.


Now, many wanted in on this action because some bold investors, and some just plain lucky ones, made lots of money. And most, in order to come up with funds to invest in these stocks, sold what was easiest – big positions in stocks priced over $1,000/share, other speculative stocks (switching one speculation for another), stocks with big profits, etc.


In addition, some short seller accounts, seeing their trades in GME and similar stocks becoming unprofitable by such large amounts, took their losses, or put up more money to satisfy their margin requirements (minimum equity as a ratio of <shrinking)> portfolio value).

My other investor concerns remain rising interest rates (10-yr T-Note) and asset class inversion (value stocks out-performing growth stocks). Recent economic slowing was expected as Covid cases rose substantially and some states quarantined their population (in other states, many self-quarantined). It is believed that the further into vaccinations we get, economic growth will come back, and of course Wall Street always looks ahead.


SPECIAL COMMENT: Cryptocurrency Tracking per Philip Gradwell, Chainalysis Chief Economist


“You can actually track cryptocurrency movements and see who is using cryptocurrencies, and for what purpose. For example, one donor used 28.15 Bitcoin, valued at more than $500,000, to pay more than 22 individuals in a single transaction, immediately before the Jan 6 Capitol riots. Authorities were able to connect Bitcoin address to the donor and recipients involved in the Capitol riot.


Under “know your customer” rules, the company providing your Bitcoin account must know who you are and law enforcement, and the IRS, can subpoena the information.

It is much more effective to transfer money through money mules and shell companies and not have it discovered, than through Bitcoin.”


In addition to the above, you may be interested in knowing that Cryptocurrency transactions (profits) must be reported on your tax return beginning this year, or you face criminal prosecution.


FOR NEW CLIENTS – If you would like to learn more about becoming a client of HWM, please allow me the opportunity to explain my services to you. Call me at 972-702-6032 or reply to this email. For those of you who are already clients, thank you for your trust.

For more information or prior letters, go to http://www.defensiveadvisor.com/blog Opinions voiced in this post are for general information only and are not intended to provide specific advice or recommendations for any individual, without complete knowledge of that individual’s total financial profile. No strategy assures success or protects against loss. Past performance does not guarantee future results.

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