Welcome to the free version of the Art of the Bubble!
1.2 Labs offers the Art of the Bubble as an educational service. Our paid plans make use of the same base algorithm that our crypto hedge fund, 1.2 Capital Management, does.
We have two primary data offerings for stocks: (1) a risk parity “Bubble Portfolio” and (2) a “Leveraged Index Portfolio”. They are pictured below relative to their benchmark: the QQQ, which is an ETF of the Nasdaq100.
Hello Bubble Riders!
BTC and ETH just crashed by more than 10%. I’ve received questions about whether you should buy the dip.
The answer is always: yes!
You should be asking: how do I buy the dip?
My best approach is to crash cost average, which is a twist on dollar cost averaging.
With dollar cost averaging, you buy a set amount of stock or crypto, say $100, each week. Jack Dorsey, former owner of Twitter and CEO of Block, buys $10k of BTC each week.
A while back (in 2020) I developed an improvement on that idea–at least a theoretical improvement–called crash cost averaging (CCA) –it’s Lesson 9 of the Beginner’s Guide. At the time, I had simulations which showed that it ought to outperform buying and holding (HODL-ing) on a massive scale (and even outperform dollar cost averaging by 180%).
We now have better than 19 months of data in a live walk forward and it has done exactly that. It’s the most volatile of our paid offerings, but here are the results.
That’s 84% over Bitcoin since 2022 – and it’s in the black, unlike BTC. It’s also better than 96% over ETH in the same timeframe and again in the black.
Notably, our CCA trades ETH, so that 96%+ outperformance is an exact apples-to-apples comparison.
The basic idea is that rather buy once (as hodling does) or buy repeatedly at fixed time intervals, as dollar cost averaging does, it buys at fixed decline intervals–say every -6% decline.
The basic problem with volatile assets like Bitcoin is that they decline parabolically, so buying at fixed temporal intervals doesn’t mean you’ll buy at the appropriate decline levels. It’s a linear solution to a non-linear problem.
If that’s that first secret, then the second one is that it makes weighted buys. The initial declines are easier to recover from. If your holding declines 10%, you need to make 11% to get back to even. It’s the later declines that matter, as an 80% drop requires a 500% to get back to even.
The CCA thus buys geometrically more at each interval of decline.
The third secret is to eliminate some of the risk. You can only crash cost average on something that will bounce back. So, Bitcoin and ETH are better candidates than … well anything else in crypto.
In stocks, I wouldn’t invest in miners with CCA, because there’s a good chance they’ll go under during adverse conditions. I might consider Microstrategy (MSTR) though, because they only buy and hold Bitcoin.
If you ever see Warren Buffett’s Berkshire Hathaway dipping significantly, that’s probably also a good candidate. And obviously, indexes such as the S&P 500 are likely to bounce back.
The final secret is knowing when to sell out. Our CCA actually did sell out before this recent dip because it uses our base algorithm to take gains–you know, Lessons 1 through Lesson 3 stuff (also Lesson 7 and Lesson 9). If you want good enough results, just sell after the SMA 200 is breached.
I consider this the simplest way to execute the art of the crash, which is the second half of the art of the bubble’s playbook. Now you know the basics and you can read more here. As a note, with BTC and ETH, we’ve passed our first two (of five) CCA targets this week – so it’s dip buying right now.
Happy Trading!
-Sebastian Purcell, PhD
The Macro Situation
“Play your cards right . . . you live to talk about it!”
— Thunder, Big Trouble in Little China
Well, the hand being played right now is not so great.
Retail sales registered the biggest gain in six months, rising 0.7% in July against a predicted 0.4%. While consumer spending remains strong, it might also figure into an extended rate hike cycle. It’s certainly on the Fed’s mind.
The real weight hanging on the shoulders of the economy is China’s economic slowdown, which has economists worried about conditions similar to the Great Recession. China has tried to boost infrastructure spending to kickstart the property market. But signs point to the property market bubble having already burst with significant consequences. China looks on target for a disappointing growth rate—5% from a 40% investment of its GDP annually.
The long game with mid- to long-term Treasuries has hit a bump. The possibility of more rate increases has kept yields at a high rate. However, a silver lining is that the spread between the 10- and 2-year US Treasuries is still relatively reasonable (-0.69). The closer the spread moves to 0, the more the yield curve moves from inverted to flat.
Crude oil dropped from its high last week but has maintained resistance above $80. Prices are feeling the pressure from the poor showing in the Chinese economy, despite a significant inventory draw.
Fear is often confusing. With precious metals it’s pulling in two conflicting directions: a US economy can’t remain strong if the Chinese economy bottoms out. Nevertheless, GLD continues to suffer as a strong US economy might bring more hikes and a stronger US dollar. Copper has sunk on the worries over the flagging Chinese economy.
- Todd Mei, PhD and Sebastian Purcell, PhD
AI Sentiment Report
The following sentiment scores use ChatGPT as part of the AI tech stack to sectors through leading indicators. (Lesson 4 of The Art of The Bubble covers the selection of lead indicators for bubble trades). The scores are most indicative for the next day of trading (a Monday), but they appear to set the general tone for the next week.
The methodology employed is based on this peer reviewed academic article, which produced 550%+ results in back tests over a 2 year time frame. We consider 4 and 5 scores to be positive, but please bear in mind that the AI model is still in its validation phase.
-The Research Team:
Dom Viera, Samantha Russell, Nicole Zinuhova, Aiza Malik
That’s it for this week!
Happy Trading!!
-The Team
Think About Subscribing
Our subscriber plans make use of the same base algorithm that our hedge fund, 1.2 Capital Management does, but modified in timeframe so you don’t have to stare at your screen all day.
Here are our sample returns since 2022 for two of our products measured against Bitcoin and Ethereum.
This newsletter is provided for educational and entertainment purposes only and should not be relied upon for business, investment, taxation, or legal advice. You should consult your own advisors for those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by 1.2 Capital Management. (An offering to invest in a 1.2 Capital Management fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation--all of which should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by 1.2 Capital Management, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.
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