Weekly: Rollercoaster
Markets have experienced a rollercoaster of ups and downs in recent weeks.
STRATEGY: For weeks, I’ve noted “perhaps this bout of market sentiment and Fed pricing creates better opportunities for digital asset investors to “buy the dip.” And last week, I said “$19,731.. any opportunity around this level would be ideal.” The dip is now here. Bitcoin is in the process of testing its 200d moving average, a systematic signal I’ve noted since it’s cross on 1/13. Maintain positive bias, yet no need to rush given recent market events. Focus on CPI next week and the FOMC meeting on the following for further clues on near-term direction. This strategy is supported by:
The continued disinflationary trend (“one
pointmonth does not a trend make”, see last week’s note)Digital asset price resilience through equity volatility: Bitcoin continues to trade around $20k, despite the roller coaster of events as of late
Continued strength in underlying fundamentals. I’ve recently discussed bitcoin holding trends, non-zero addresses, and active address growth for Bitcoin and Ethereum
The probability of a “soft landing” (don’t get ahead of yourselves with regional bank drama) - consider a resilient US economy, disinflationary trends a robust labor market, and decent equity earnings as a “good enough” foundation for risk assets after an incredibly tough year
The still-likely October as the cycle low in equities, and what a better equity market means for digital asset relative value
The systematic signal of price > 200D moving average, now at $19,710 which is now being tested
Risks to this strategy include:
Bank contagion leading to risk-off, which crypto often faces the brunt of
Further uptick in Fed expectations (which have come off their march peaks), leading to defensive equity positioning and a *meaningful* bitcoin break below the 200d moving average
3/10/2023
Weekly Strategy Note: Rollercoaster
Wow, the last few weeks have been a rollercoaster - this one, ending with fireworks as well. Of course, there’s been a large focus on today’s February employment report, but a bank run on a silicon valley bank (no pun intended) was not on anybody’s bingo card.
In just 48 hours, fears of credit, contagion, and duration mismatches have troubled markets – with the US yield curve for now illustrating very “risk-off” type activity.
Of course – concerns of what can come are fair. Better safe than sorry. SVB is one of the larger regional banks and is highly integrated with many PE and VC firms. When news broke of their bond portfolio fire sale, a good old classic bank run began. Information flows quite quickly these days.
But until we learn of further information, hold your horses. Large bulge bracket banks, along with the other G-SIBs – are much better capitalized than they were in 2008. The Fed’s stress tests are there for a reason, and equity analysts at Wells Fargo, Morgan Stanley, and BofA have all published reports on the likelihood of this being idiosyncratic. While this may not be fully isolated, it’s for now unlikely to unravel a banking or global crisis. Again, the stress tests are there for a reason.
Nonetheless, these events have offered yields a reason to reverse their recent course. The US yield curve has put in reversal signals, with yields not only breaking below their recent ranges, but putting in bearish engulfing candles that that have resulted in 20day lows for yields:
So, in just two trading days, yields have dropped:
US 2YR: -48bps
US 5YR: -41bps
US 10YR: -30bps
US 30YR: -17bps
It’s no doubt that these will events impact Powell’s thinking – how can he ignore potential concerns with the regional banking industry? Even if this is idiosyncratic, the FOMC meeting is in two weeks. He will be questioned and there will likely be something in the FOMC statement.
As a result, the market has pulled back expectations of a 50basis point rate hike, and even has lowered their peak terminal rate. On Wednesday, the market priced in an 80% chance of 50bps – now, at time of writing, prices in just 33%. Of course, Tuesday’s CPI may weigh heavily on the Fed’s decision. (See last week’s note where I discuss one month does not a trend make).
Even so, the large decline in regional banks (down -16%, broad financial sector -8%), has led to a tough week for equities, with the S&P 500 down to 3,870 (time of writing), and below its 200D moving average (for the time being).
These macro concerns alongside idiosyncratic headlines within digital assets led to the perfect opportunity for shorts and sellers to break bitcoin’s range, stop sweep below $20k, and then, test the 200D moving average.
At last, the recent uptick in Fed pricing has led to a better opportunity to buy the dip. The pullback from the recent rally highs has reached ~21%, much better than the 12 and 13% opportunities previously. But now, there is no time to rush, given the overall “uneasiness” across capital markets.
Still, bitcoin is up 21% YTD (ether is up 11.7%), while the S&P 500 is up just 0.7% (at time of writing, 3pm Friday).
So, has my strategy changed? No. Play the ball how it lies. For now, no contagion is present, and I’ll leave it to bank analysts. More importantly, however, market pricing will indicate if so. Intermarket analysis always shows the way.
In terms of the bitcoin dip – this is what we were waiting for. Bitcoin has tapped it’s 200D moving average, and we now have an opportunity to see how it interacts. Do traders come in and defend these levels?
Consider that realized price, or the average on-chain cost basis of investors, sits at $19,953. When price falls below this level, it has historically been attractive buying opportunities for long-term investors.
Bitcoin’s recent peaks have historically been 3, 4, or 5x higher than realized price, offering large asymmetry. We can see the times in which bitcoin was below it’s realized price, circled below:
I must note the recent idiosyncratic headlines within digital assets: Silvergate is now going through liquidation. While many exchanges have already moved to Signature, this certainly doesn’t help perception: many crypto firms have shown their true colors over the last nine months – irresponsible management and another crypto firm failure impacts the viewpoints of TradFi investors, who continue to tread very lightly.
New York’s AG also alleges ETH is a security in their recent lawsuit against KuCoin. While they likely don’t have any jurisdiction, it certainly has rung a bell. Of course, ETH maxis argue - and bitcoiners rejoice. But as I say – it’s likely many of these digital assets are securities. If one is concerned with that, bitcoin is the clear-cut answer.
Note that even so, ether has actually outperformed bitcoin since the crypto market began its recent rollover on February 22nd (ETH/BTC from 0.068 to now 0.71). While ether is more cyclical in nature, perhaps post-Merge tokenomics and the deflationary burn has improved its downside capture versus bitcoin. This would be a very interesting development for both traders and investors.
Going forward:
We wait until next week’s CPI – which can cause trouble if it comes in higher than expected. Continue to monitor how yields respond, as well as both GOLD (+2.8% in 3D) and the DXY Index, (down 1% in 3D) both of which coincide with a less hawkish Fed than what was feared earlier in the week.
Then, get your popcorn ready for the March FOMC meeting on Wednesday, the 22nd.
STRATEGY: For weeks, I’ve noted “perhaps this bout of market sentiment and Fed pricing creates better opportunities for digital asset investors to “buy the dip.” And last week, I said “$19,731.. any opportunity around this level would be ideal.” The dip is now here. Bitcoin is in the process of testing its 200d moving average, a systematic signal I’ve noted since it’s cross on 1/13. Maintain positive bias, yet no need to rush given recent market events. Focus on CPI next week and the FOMC meeting on the following for further clues on near-term direction.
For illustration, I color code the chart for when bitcoin’s price is above the 200-day moving average (green) and below (red). This simple indicator is a clear and simple “signal” for those looking to identify the longer-term trend.
We can identify 17 occurrences when bitcoin’s price flipped above or below the 200D moving average, illustrating a robust signal for long-term trend following.
Stay Tuned,
Joe Orsini, CFA, CMT