The Signal: Course Correction

The Market Signal

What’s driving volatility?

The Russia/Ukraine standoff is no longer a standoff, and with the Russian movement into the separatist-held regions of the former Soviet republic – and Ukraine’s recent declaration of a state of emergency – risk assets like stocks and cryptocurrencies suffered. The S&P 500 is now officially in correction territory, off 10% from its peak. In stocks, energy remains a winner in this crisis, while defensive sectors like healthcare, consumer staples and real estate remain among the few places to avoid large losses. 

These geopolitical developments crystallize one of the four main headwinds that Domain Money’s investment team (“DM Advisors”) sees for growth and risk assets. The other 3 we briefly touched on last week: 1) higher expected interest rates 2) removal of liquidity accommodation by the Federal Reserve 3) decelerating growth of companies that substantially benefited from Covid-19 lockdown behaviors.

Is it all bad?

Despite headwinds, fear in equities and crypto is not broad-based (for now, barring further escalations). Both Morgan Stanley and J.P. Morgan analysts this week in television interviews and investment notes voiced support for equities long term in the face of the geopolitical risks, and if you look at the buying pressure in cryptocurrencies, geography matters.

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In the past two weeks, support for bitcoin, cryptocurrencies, gaming/metaverse assets and Defi sectors varied significantly by geography, according to data collected by TheTie. During U.S. trading hours, weakness in the aforementioned assets was pronounced – a proxy for U.S.-based investor interest. European trading hours - a region most impacted by recent geopolitics –  were a key support for most crypto assets at the beginning of last week, only to wane toward the weekend. And Asia, insulated (as much as that is possible) from the crisis, was biased to the upside in crypto, with the exception of privacy coins. 

For example, ethereum, assets tied to decentralized exchanges, DeFi, and Layer-1 blockchain tokens all rose over the two-week period during Asia hours. Selloffs in the U.S. during the same period were the most pronounced in ethereum, decentralized exchanges, gaming/metaverse, privacy assets, Layer-1 blockchain tokens, and lastly in DeFi – the worst among the sectors tracked – with losses reaching 15% during U.S. hours.

The Data Signal

Why are we drawing so many parallels between stocks and crypto?

For one, the S&P 500 and bitcoin’s correlation is now the closest since October of 2020, when measured on a 90-day basis, according to Arcane research. And as money flows out of high-growth and riskier assets, it’s important to weigh these factors as part of your portfolio. 

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What are your thoughts on those high growth names?

Heavy selling in growth names following earnings is attracting a lot of attention, but the truth is, according to DM Advisors, the selling has been occurring over the last 6-12 months. Roku, for example, hit its all-time high in July, and Roblox hit its all-time high in November – well before their recent selloffs following their earnings reports last week. 

“We think these are world-class companies that have substantial opportunity,” DM Advisors head of investment strategy Andrew Pesco said of Roku and Roblox, noting that the price at which these companies trade (ratios of 5.7x sales and 13x sales, respectively), are “attractive entry points” for long term buyers. The companies’ forward outlooks missed analyst expectations, and growth is slowing, but with revenue growth of 33%, and 83% respectively in their latest quarters, DM Advisors expects revenue to grow substantially in the coming years. 

DM Advisors is not alone in that support.  ARK Invest’s Cathie Wood disclosed purchases of Roku and Roblox following the selloffs, calling the former one of the best ways to play the metaverse, according to Bloomberg. Retail traders, according to Fidelity’s disclosures, were net buyers of the Roblox dip on Wednesday. And now, Signal**, on the Domain Money app, displays positive social sentiment for Roblox vs significant negative sentiment last Wednesday. 67% of Wall Street analysts have a buy rating on the gaming stock. 

In the case of Roku, shares rebounded more than 8% Tuesday as the share price stabilized. Social sentiment indications from Signal indicate that mentions tilt more positive than negative – a departure from last week’s sentiment. 78% of analysts on the Street are buy-rated on the name.

You can view key indicators in the app in the asset detail screen by selecting an asset from the home feed.


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** These measurements were generated by Domain Money Social Sentiment Signal on 2/23/2022 and they fluctuate continuously in response to the various contributing data points and trends. Domain Money Signals are tools that aggregate information related to market sentiment and should not be relied on for investment decisions.  More detailed information about Domain Money Signal is available at https://help.domainmoney.com/en/?q=signal

* Domain Money Advisors, LLC, an investment advisor registered with the U.S. Securities and Exchange Commission and an affiliate of Domain Money, is currently recommending the following assets contained in this edition of Domain Money’s The Signal as part of Managed Strategies:  ETH, BTC, ROKU, RBLX