How to profit from a market recovery

In this article we share what an investor could do to prepare for a market recovery. We will cover:

• Where we are in the market cycle for equity and crypto.
• How this bear market is different from the 2008-09 cycle.
• What to do to prepare yourself for a market recovery in the next 6 months.

None of this is legal or financial advice of any kind. This content should be considered as opinions, for entertainment and educational purposes only.

The Macro

The markets hit a local bottom in the U.S. equity market in October/November 2022. The S&P 500 has gone up 10% since mid-October. In the rest of the world, assets have been slowly recovering as well.

A report from Adobe Analytics shows that U.S. shoppers spent $9.12 billion online in Black Friday 2022, a 2.9% increase over the previous year, and $11.3 billion on Cyber Monday, up 5.8% from 2021. This is just in the USA.

It’s hard to know if these sales numbers are due to inflation (items costing more), or if they are a result of people buying more. The general feeling is that people are buying stuff, even in a bear market.

As of late 2022, the economy is still in a high inflationary monetary tightening environment in the U.S.. But things aren't as bad when compared with the previous bear market of 2008-9. There were multiple quarters of negative 2 to 3% of GDP growth and unemployment at almost 10%.

This is a stark difference to where we are today: unemployment figures came in at 3.7% for Oct 2022, almost a third less than in the 2008 crisis. The situation isn't as bad as the financial media puts it. That may be a fundamental reason why stocks aren’t selling off further, given we are in a tightening environment in terms of monetary policy.

Where do we go from here?

If we look at the short term, the market has risen since mid-October and early-November 2022. Recovery has been choppy due to the macro environment but the market breadth is high.

Over 70% of stocks in the U.S. common stocks pool were above the 40-day moving average (a market breadth indicator) in late November 2022. In comparison, the S&P 500 went up 15% in the bear market rally of July and by August the market breadth was up 80%.

In the short term it’s likely there is a correction in late December or early January 2023. In general, these bear market rallies last three months.

In the medium term, long bear markets last from 18 to 24 months, and we are are in the second half of that, as of late 2022. There is an expectation of recovery.

In the 2008 financial crisis aftermath, there was a spillover from financial markets to the mainstream economy. The economy was in recessionary territory then, but this bear market cycle has not had that spillover into the mainstream economy. At least not with the same magnitude.

The Crypto

There was a sharp leg down since the billions of dollars lost in the FTX and Alameda drama in early November 2022. The exchange was using customer’s assets for trading, as well as using FTT, their own token, as collateral. When the token price went down, FTX went under and a lot of people who left money in FTX lost it all.

Besides retail investors losing money, the FTX contagion continued to spread to a number of other companies:

• BlockFi, a company that was once bailed by FTX, filed for bankruptcy.
• Liquid Global, an exchange that took FTX’s help, halted withdrawals.
• Genesis, a crypto lender, suffered a liquidity crisis and is looking for $1 billion to avoid going bankrupt.
• Gemini, a leading crypto exchange, is seeing users getting their BTC out.
• Silvergate Capital, another crypto firm, suffered a bank run on speculation that they had ties with FTX and Sam Bankman-Fried.

Cryptocurrencies went down as a result:

• Solana (SOL) dropped to 14th by market cap, lower than Shiba Inu.
• Serum (SRM), a DeFi project on the Solana blockchain, dropped 40%.
• BTC and ETH struggled at their resistance levels of $17,000 and $1200, respectively.

Market breadth improved a few weeks later but the event stirred an urge for regulation. It made people aware of the dangers of centralised entities and the importance of self-custody. In contrast, decentralised protocols kept operating as usual. In fact, some of FTX/Alameda's funds were liquidated by one such protocol.

Historically, we can expect crypto to follow the risk asset cycle of the larger macro environment as described earlier. This means there may be a recovery by the end of Q2 2023.

How to prepare for a recovery

1. Have cash ready. You can’t invest in assets if you don’t have money. Have dry powder ready to buy assets between now and the end of this bear market. The “time to buy is when there’s blood in the streets”, said Nathan Rothschild in the 19th century, who followed his own advice and made a vast fortune speculating in the London Stock Exchange after knowing the outcome of the Battle of Waterloo.
2. Pay attention to the market. Even if you’re a long term investor, it’s good to keep an eye on the markets, both the crypto and the macro environment. This doesn’t mean checking crypto Twitter all day, but keeping up with the news in a healthy way can alert you for problems or allow you to spot opportunities.
3. Make a list of top 100 or top 200 cryptocurrencies. Look at their price history as they were getting out of the crypto bear market of 2018-9. Is there a pattern there? How long did it take for their prices to rebound from the bottom? And what was the price range like once they rebounded?

Why top 100, top 200? Because the former have over $300 million market cap and the latter above $100 million. Anything smaller than that doesn’t have enough liquidity. It isn’t investable nor an amount enough to answer accurately to the questions in point 3 above.

Doing that exercise will give you a better understanding of what to look for when you’re in the middle of a market recovery. You also won’t need to rely on second-hand knowledge or wild guesses. This could take you an hour or so and can be one of the best investments of your time.

As a macro exercise, you can do the same for mainstream stocks. Look at the 2008-9 bear market and how the equity market came out of that situation. How many cycles did it take?  How long did it take? What was the magnitude of those mini cycles? That will give you a better understanding of market structure when you’re at a turning point in the market.

P.S.: We post a weekly recap of macro and crypto in our Twitter. Follow us and keep up to date and get an overview of the markets.