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What Drove Markets in January? Pro Indices Analysis

What Drove Markets in January? Pro Indices Analysis
February 3, 2022
Dylan Dittrich

Earlier this week, we released our regular monthly recap on the Altan Insights 100, which is a market capitalization-weighted index tracking the 100 largest market cap assets currently trading fractionally. For the third straight month, performance for the Altan Insights 100 was negative, as markets hurtled lower in January alongside risk assets across the investment spectrum. Fractional markets actually held up considerably better, even at the high end of the market, as is monitored by the AI100; for example, in January, the NASDAQ dropped 9%, Bitcoin fell 17%, and Ethereum lost 27%. The slide in fractional, however, had already been in motion well before we turned the page into 2022, and as a result, it does not feel like January performance was a bleed-through of broader risk asset fears in other categories.

For the first time since August 19th, the index dipped below 1,000. From peak to trough, the last prolonged drawdown (20.7%) of the Altan Insights 100 lasted 146 days, spanning about half of the first quarter and the entirety of Q2. The current drawdown has been in motion for 127 days, and through the 31st, the index is down 15% from its peak. At no point in the prior drawdown was there a false dawn where the index broke above the 50 day moving average, and the same has held true here.

Clearly, the high end of fractional markets has suffered in recent months, and that downward momentum proves difficult to arrest. That performance, though, isn't emblematic of how the markets have done across the spectrum - across market caps, asset classes, and marketplaces. There are a number of other ways we track market performance for our Pro subscribers, and we'll share where we're seeing pockets of market health and momentum.

To start, we monitor an equal-weighted index of assets trading fractionally; on a monthly basis, the index is rebalanced to include every asset currently trading at an equal weight. Those weights vary throughout the month with performance, but on the first, each asset is on equal footing. The performance of that index was significantly superior to the Altan Insights 100 in January. The index lost 1.9%, as compared to a-5.2% return for the AI100. This means that a greater level of diversification beyond large cap assets and stronger weighting towards smaller cap assets offered fractional investors stronger downside protection. From the chart below, we see that this was actually not the case for much of the month. Only after the 23rd did a significant chasm in performance open between the two indices.

The damage from the two prolonged drawdowns in fractional - the first in the early stages of last year and the second starting in Q4 and spanning to today - has meant underperformance since inception for the AI100 vs the equal-weighed index. It's important to note: because the equal-weighted index is rebalanced monthly, effectively buying losers and selling winners to restore equal-weight, it follows logic that it would outperform, particularly as markets begin to fall and momentum is to the downside. However, when markets recover, as was the case in the third quarter of last year, our data shows the cap-weighted, large cap Altan Insights 100 follows a much steeper and faster path to recovery off the bottom. In the third quarter last year, the Altan Insights 100 gained 41.7%, well above the 24.5% of the equal-weighted index. So, when the freefall slows and markets begin to stabilize, it's particularly beaten-down larger cap assets that lead the charge higher.

And what specific categories were beaten down to start 2022? According to the Altan Insights Fractional Indices, which are market cap-weighted indices tracking the performance of each asset class, the three most challenged categories were Trading Cards, down 20.2%, Books, down 13.6%, and Luxury, down 11%. Trading Cards continue to suffer at the hands of a Pokémon trend that brought disappointing comps throughout the summer and fall; fractional performance has not infrequently lagged these results, and that catch-up (catch-down?) effect continues to weigh. Books saw two larger market cap assets - The Great Gatsby and Harry Potter and the Philosopher's Stone - put pressure on the asset class. Both performed their way out of the Altan Insights 100 last month, and Potter now trades below its November 2020 level, despite a slew of strong 2021 auction results. In total, nine of thirteen asset classes were down for the month. Notably among the negative performers, NFTs lost just 1% despite the carnage in crypto and ETH in particular. With the ETH floor of BAYC, for example, charging higher throughout the month, fractional investors may be less concerned with cryptocurrency volatility and primarily focused on underlying project strength.

Just three asset classes saw positive January performance: Sneakers, up 2.3%, Historical Memorabilia, up 16.3%, and Comic Books, up 16.8%. Keeping in mind these indices are cap-weighted, the Memorabilia performance was driven by the trading debut of the Declaration of Independence, which was the busiest in fractional history. That asset gained over 56% on the month. Comic Book strength was remarkably broad-based. The category closed 2021 with relative weakness, fading out of the public consciousness after a roaring summer, but six books gained over 40% for the month.

As the prior measures are cap-weighted, we also examine the average January return across categories (which weights each asset equally). The difference is quite minimal, though two three categories - NFTs, Sports Memorabilia, and Wine & Spirits - flip from modestly negative performers to modestly positive performers. NFTs are spared by the last day trading debut of BAYC #9159, which gained 28%. Sports Memorabilia, in particular, has seen higher market cap items suffer, as a greater number of shareholders share those larger IPOs, and absent immediate comps to continue to support the thesis, many are keen to liquidate and rotate elsewhere. You also see that the high-flying Declaration debut is muted by this measure, though Historical Memorabilia remains a positive performer, but only very narrowly.

Perhaps the best indicator of asset class strength during the month is the percentage of assets that finished with positive returns. This metric paints a bleak picture. We can ignore Cars for the moment, as no assets traded during the month, so all were flat. But not a single art asset appreciated on Otis last month, and almost every Luxury, Trading Card, and Book asset was either flat or down. All but two asset classes saw less than 50% of assets trade higher in January. More than half of NFTs appreciated, which is stunning given the environment for crypto, but is perhaps illustrative of not only fractional demand for these assets, but also potentially of newcomers being driven to the platforms by NFTs specifically. This is where the broad strength of comic books shines through. 72% of Comic Book assets that were trading went up in January! In this environment, where almost nothing went up! There are a number of factors you could point to driving the appreciation: constrained supply following buyouts in 2021, the late-month Tales of Suspense buyout offer, pent up demand for books making their live trading debuts, and undue weakness in late 2021. What's clear is that there is widespread fractional demand for the category, and because of the number of books bought-out, the supply of options to express a bullish thesis has not grown immensely relative to other asset classes.

Get this: since June 30th of last year, the number of comic books trading fractionally has actually declined by 17%. It's the only asset class in which that's the case. Cars and Art have remained stable, and just about everything else has grown in supply by leaps and bounds. Now, essentially everything ripped higher off the bottom after June 30th, so there isn't much to glean in differences in performance. But, if you look at the increase in supply versus the performance from September 30th onward, there may be the makings of a trend forming. The data is too limited and inconclusive at this stage, but this is certainly a factor to watch. It's a logical one as well, markets driven by supply and demand are likely to suffer when supply increases swiftly.

From a marketplace perspective, Otis performed best in January, both in terms of our market cap-weighted indices and in terms of average January ROI. That the average ROI was so much higher than the index performance tells you that it was not the largest assets that performed best on the platform. Rally had the second best market cap-weighted performance, but the worst average ROI, suggesting there has been a flight to large blue-chips relative to the field on that platform. The opposite is true on Collectable, where the market cap-weighted index lagged the average ROI, as larger cap assets weighed on platform performance - this was aptly illustrated by the measures of Sports Memorabilia performance for the month.

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It is not possible to invest directly in an index. Exposure to an asset class represented by an index may be available through investable instruments based on that index. Altan Insights does not sponsor, endorse, sell, promote or manage any investment fund or other investment vehicle that is offered by third parties and that seeks to provide an investment return based on the performance of any index.  Altan Insights is not an investment advisor and makes no representation regarding the advisability of investing in any such investment fund or other investment vehicle. A decision to invest in any such investment fund or other investment vehicle should not be made in reliance on any of the statements set forth in this document. Prospective investors are advised to make an investment in any such fund or other vehicle only after carefully considering the risks associated with investing in such funds, as detailed in an offering memorandum or similar document that is prepared by or on behalf of the issuer of the investment fund or other investment product or vehicle.  Inclusion of a security within an index is not a recommendation by Altan Insights to buy, sell, or hold such security, nor is it considered to be investment advice. Closing prices for Altan Insights indices are calculated by Altan Insights based on the closing price of the individual constituents of the index as set by their primary marketplace.

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