The Largest Crypto Exchange in the World gets Hit HARD!

Hello, pack! 🐺

This is Howling Markets, the friendly park ranger guiding you through the treacherous mountain trails in the natural park of the financial markets!

Today we will be covering:

• What Is a Short Squeeze?

• Binance Pays a Multi-Billion dollar fine and its CEO Resigns

• Short Selling Hedge Funds Lost over $43 Billion

• Equity and Debt Markets Weekly Update

• And more!

EDUCATION

What is a Short Squeeze?

A short squeeze is a powerful and rapid price surge caused by the fire-sale of short positions in the market. Short squeezes often occur when the stock price has been fighting a resistance level for a while and investors become optimistic that the stock’s price will start moving back down again, opening short positions.

Then, unexpectedly, some external information full of optimism hits the market, pushing the price marginally higher. In cases in which there are billions of dollars of open short sell orders, and the price surge is enough to trigger a few significant stop losses or margin calls, it is often the case that this fire-sale will snowball to all other market participants, causing a rapid price increase.

Usually, because this move is only in part fueled by news and intrinsic value, while the majority is just caused by the purchase of shares to close short positions, short squeezes are not long lived, and the price often retraces back to its previous resistance level.

Short squeezes are the perfect example of the famous quote “Markets can remain irrational more than you can remain solvent” by Keynes. This quote underlines that even if you rightfully believe that the market will move down, the market can keep moving in the opposite direction more than you can keep funding your short positions, ultimately losing money. Because of this, short selling is an activity reserved to more experienced traders.

NEWS

Binance CEO Resigns as The Exchange Is Sentenced to Pay $4.3bn in Fines

Just over a year after the tumultuous fall of the crypto giant FXT, another cryptocurrency exchange has been sentenced to pay quite a large sum of money.

Binance, which just over five years ago was a mere startup, by November 2022 it managed to control over 50% of the crypto market, skyrocketing in popularity and in userbase. However, this growth might not have been as “healthy” as it might have seemed.

Last Tuesday Binance pleaded guilty to several counts of money laundering and breaching international financial sanctions and agreed to pay more than $4.3 billion in fines. This decision was taken after the US Treasury department stated that the crypto exchange has failed to report “well over 100,000 suspicious transactions” related to ransomware attacks, narcotic and weapon trafficking, and terrorist organizations such as al-Qaeda and ISIS.

On the same date, also Zhao, the founder and CEO of Binance, pleaded guilty to various counts of breaching money laundering rules and agreed to pay a personal fine of $50 million. Consequently, he decided to step down from chief executive of his company and, under the terms of his plea agreement, he is now barred from any involvement in Binance’s management.

Additionally, the former CEO is still waiting for the sentencing hearing planned for the 23^rd of February 2024, where he could be sentenced to 18 months in prison in addition to the fine he has already paid. Therefore, to avoid being held in custody until the sentencing hearing, Zhao has also paid a $175 million personal recognizance bond while awaiting his trial.

NEWS

Market Rally Wreaks Havoc Amongst Short Hedge Funds

As we will shortly see in our weekly market recap section, the stock market is following an extremely rapid and exponential growth that is breaking all resistance levels.

As a matter of fact, this recent move has been so explosive that most technical indicators, including the Relative Strength Index, show strong signs of overextension. If you are not familiar with the RSI, don’t worry, we explain it in the last section of the newsletter!

However, the good news for the stock market do not seem to stop, and after the last week’s technical break down of bond rates and the drop of inflation to 3.2% in the US, now also oil prices have decreased by an additional 5%, continuing to fuel the stock market rally.

During this singular period, many hedge funds that had positioned themselves short on the market suffered an estimated loss of more than $43 Billion over the past few days.

Today’s Howling Question

And now, let’s test your knowledge about the most common indexes in the US Stock market. What is the VIX?

a)  An index tracking the performance of Large Cap stocks

b) An index tracking the relative performance of Bonds with respect to Stocks

c) An “equal weight index” tracking the performance of the S&P500 components, not weighted by market capitalization, but rather with equal weights.

d) An index tracking the tracking the relative performance of Stock Options with respect to Stocks

e)  An Index tracking the expected volatility of the S&P500 index

Try to answer this question, then check the correct option and explanation after the next news!

NEWS

Equity and Debt Markets Update

As we briefly mentioned during the educational section of this newsletter, the market continued to relentlessly move higher throughout the week gaining almost another 1% with respect to last Friday, achieving a total return of 10.68% since the end of October.

However, the stock prices we still showing signs of decreasing momentum, closing the day with shorter and shorter candles’ bodies.

These signs are also reported by the Relative Strength Index (RSI), a momentum indicator that measures the speed and magnitude of a stock’s recent price movements. A high RSI value (around >60) shows that the recent move has been extremely rapid and that the stock is overvalued. If instead the RSI value is below 40, it indicates that the stock is relatively cheap.

As you can see, the RSI usually anticipates peaks in the stock price, so it can also be used as an indicator to spot price reversals. Additionally, the indicator is currently reading a value of 70, meaning that the SPX is currently extremely overvalued and likely to fall in price.

On the other hand, bonds continued to move down throughout the week without any significant jumps or red days. Check out the US10Y’s chart below:

Answer

The correct answer is e) An Index tracking the expected volatility of the S&P500 index

The Volatility Index (VIX), formerly known as the Chicago Board Options Exchange (CBOE) Volatility Index, is an index tracking the institutional investors’ volatility expectation on the S&P500 over the next 30 days.

So, a higher VIX means greater volatility in the market, while a lower VIX means that professional investors are expecting a calmer period for equities over the next 30 days.

Additionally, there is a negative correlation between the VIX and the SPX, so when the VIX rises the S&P goes down. You can check this out in the image reported below, where the SPX is reported in orange and the VIX in blue.

HOWL-WORTHY MEMES

🐺 See you next time!

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