This post was initially drafted and sent on 1/14, but beehiiv locked my account for an unknown reason… reposting today.

Risk Cycle Thoughts

The current bull-cycle in risk assets began in March 2023. After the extremely controlled washout of 2022 (a nearly perfect five wave drawdown, for the Elliott Wave enthusiasts out there), we saw QQQ flip relevant moving averages and then retest the MA confluence. The blue box is the measured move off a cup and handle pattern from Nov ‘21 to Dec ‘23.

Unsurprisingly, Bitcoin bottomed at the same time and began its ascent in October 2023 (6 month lag). I got long at the circle and have been sizing up on consolidations. I view Bitcoin as the most liquid, risk-on proxy available. For reference, Bitcoin is trading with ~$65B in daily dollar volume (per coinmarketcap) and Ether is trading with ~$34B in daily dollar volume, while SPY, QQQ, and NVDA trade with daily dollar volumes of $35B, $17B, and $30B respectively per day.

Overlaying the PMI on the QQQ monthly chart, we can see that PMI produces somewhat of a mean reverting wave. The local bottoms of this wave generally line up with the corrections in the market - ‘02, ‘09, ‘16, ‘20, ‘22.

Looking for a correction in risk assets to begin in the Fall or Winter of this year, or when the PMI begins to top out and roll over — PMI needs to reach the mid 50s first. Until then we are long BTC, ETH, SOL, SUI (liquid risk-on leaders) and allowing the market to concentrate our positions for us.

The rotation plan for a risk-off environment is to move some of the portfolio to cash and allow remaining risk positions to sit in SPY, which has much lower volatility than crypto assets. But, I am not seeing the signs that this is warranted yet.

SUI Ecosystem

SUI is a newer Layer 1 and the ecosystem is young. Overall my view is that the risk / return is extreme enough to warrant only holding the base token here - a la Solana in 2021 (and to some extent this cycle as well). However, it is always fun to gamble a smaller stack from the PA on coins that can have outsized moves. Liquidity is, as always, absolutely key — do not get trapped in NFTs on young Layer 1s… we all made this mistake last cycle.

Any position I hold in these type of coins is limited to either: the amount airdropped to me for using protocols early on, or a maximum 2% of my total book. That maximum allocation may change if the market dynamics change significantly in favor of an “alt szn”, but at present we are in a Bitcoin and select Layer 1 dominated cycle.

As with the technical analysis posted previously, I find The Lifecycle Trade provides useful filters to help sift through which tokens/stocks are investable. The main filter we are using is average daily dollar volume in excess of $20m. This dollar volume filter does not mean that stocks/tokens with less volume cannot perform well, or do not have good fundamentals, we are simply trying to stack the deck in our favor by identifying where large amounts of money are flowing on a consistent basis.

Using coinmarketcap.com, we can filter the below list of potential tokens down significantly; only DEEP, CETUS, and BLUE have dollar volume > $20m on a consistent basis. Of those three names, only DEEP has an appealing chart.

DeepBook (DEEP) - An onchain protocol handling order routing, matching, and settlement for market makers and DeFi protocols. Retail users do not interact with DeepBook directly.

Suilend (SEND) & Navi (NAVX) - borrowing / lending protocols

Cetus (CETUS) - LP protocol

Bluefin (BLUE) - onchain perps (leverage) trading

Bucket (BUT) - Native stablecoin; this project was launched before USDC launched native tokens on SUI, remains to be seen how widely adopted this protocol will be. Now that the BUT token has dropped as of this morning, I expect usage to drop significantly.

Looking forward to Walrus Protocol (WAL) which I believe will be another ecosystem coin worth holding (after an initial shakeout).

Small position sizing in these ecosystem names reduces volatility, allowing us to hold our convictions through sharp drawdowns (without getting chopped up) which can happen suddenly and reverse quickly.

All the best,

Max