Here's What I'm Looking AT
Here's What I'm Looking AT
1/22/2023 Intermarket Relationships of the 5 Primary Asset Classes
Yes, I’m a little slow in posting and there are a lot of lines here! I keep them as a means to know where we are and where we’ve come from.
What’s Important About Market Structure?
Clear established downtrend. Started Nov ‘21 – (dark red lines)
Large descending wedge within the downtrend (red dotted lines)
a. Wedges tend to indicate trend changes/exhaustion of current price direction.
b. Coincides with some on-chain bottoming signs in MVRV and Realized Price
Gold channel – the angle of descent has flattened while prices have traded in a tighter range. The breakout to the upside (above $18k) is an alert.
The dark blue channel goes back to the 2018 lows / is the general slope of prices.
a. For me, this slope is an indication of long term sustainable pricing. Providing a
good visual gauge of mean reversion, or sustainable rate of change in price.
How Do Other Asset Classes Look?
When you break it down, there are only 5 assets to choose from in terms of where you’re going to invest: Equities, Bonds, Commodities, Currency (DXY), and Bitcoin.
We still live in a dollars or not dollars world. We need them for consumption and global trade. Yes, Bitcoin is attempting to change that, but it’s still early. As we’ve seen since the fall of 2021 the dollar is still globally a very desirable form of money.
Though cracks are obviously there.
As it stands, everything we do revolves around one question. Do I need dollars, or should I invest in something else?
The answer is different for everyone. It’s dependent upon their immediate and future needs. So, timeframe is critical component to understand when it comes to investing.
Of the five asset classes, gold, commodities, and the dollar are the only assets in positive territory over the last 14 months.
As Wall Street has adopted Bitcoin, the behavior of the asset has changed a bit. Rather than acting as sound money asset it’s acted more like a risk asset.
Only time will tell if this is temporary or permanent. Rather than debate it, I’m focusing on the various intermarket relationships. What can they tell us about the market and trading behavior of market participants?
From March to August 2020, Bonds topped. Risk assets and Bitcoin followed in November 2021. Not long after, equities followed suit in January 2022. Then commodities in June of 2022. A typical and expected sequence of asset rotations.
Taking a closer look, over the last 15 weeks, the dollar has sold off hard. Relieving most of the downward pressure on all other assets. Like Mr. Miyagi said… Dollars on, Risk off. Dollars off, Risk on.
Over this period, the dollar is down about 10%. Outside of commodities, all other assets are up 8% or more, and Bitcoin looks to have sync’d back up with Gold (sound money) and delinked from tech. The QQQ, not shown, is only up 8.7% during this span.
The traditional rotation at tops and bottoms starts with Bonds, then stocks, then commodities. With a new asset class embarking on the group (Bitcoin / digital assets), it is important to monitor how they ultimately fit into this picture.
Bonds look to be working on a bottom but are lagging equities and bitcoin. The latter are coming out of channels or bumping up against resistance while bonds are still outside of their longer term channel. Given bonds are lagging, this rotation is slightly atypical.
Stocks appear to be working on a bottom. Across the board, many stock charts are beginning to look positively structured. On the bull side of things, maybe the bottom is in?
4,200 is proving to be key resistance. Plus there is the fact that bonds didn’t bottom first… unless bonds go on a tear.
With all fundamental data points in recession territory (ISM, PMI, sentiment, NYFRB recession probability, ECRI), it feels as if we are in our first ever “not recession”, recession.
If that’s the case then the other shoe to drop would be weak earnings, analyst revisions to the downside for EPS’ and weak guidance. If, that happens, then I assume stocks would roll back down into the downtrend (red) and work towards the lower side of the blue channel. The one caveat here is that consumer sentiment is typically a contrarian indicator and it’s been nasty. The risk here is staying too pessimistic for too long.
Gold visually has been exactly the inverse of the dollar recently.
With geopolitical tensions abound this makes sense. Gold typically makes moves before events become known. Most physical dealers have quoted gold pretty consistently at about $200 over spot, even when gold was weak. In my opinion, signals a steady bid and it’s been there for years now.
Looking at broader commodities they seem to be trading in line with what one would expect; being the last to bottom. Their structure, in that regard, makes sense.
The initial rally from the lower side of a long downtrend was the sign that inflation would in fact be a challenge. The breakout was the guarantee. Though notice commodities peaked in front of falling CPI, acting as a signal.
If Bitcoin Led Us Down, Will it Lead Us Up?
There’s been a noticeable change in the grade of descent, and at the same time, BTC has broken back above key resistance, at $18,200 (horizontal red dotted line). On the breakout, gold channel, Bitcoin went on a tear. Does BTC hold above the long term trend (blue) or does it act as resistance?
We need to find out if the old channel acts as resistance or ignites a move. If price holds between $18k and $21k on a pullback the structure begins to look promising.
As I’ve laid out above, in this environment, a lot depends on the dollar. It’s been that way since late 2020, early 2021.
We can make a few assumptions. We’re at the upper side of a long term downtrend. If that continues to hold then we’ll probably continue to see the dollar weaken though it won’t be a straight line.
On the other hand, if the Dollar Milkshake Theory continues to hold true then we may soon see the dollar rally and continue its break of this downtrend. Recent highs peaked above the trend but quickly fell back below as systemic fault lines began to fracture.
For all assets, the dollar resuming its uptrend would likely be the worst case scenario. This would likely continue a flight to safety; bids for treasuries, gold, and cash. Bitcoin should do well, but it will be the first real global bear market it’s participated in.
Technically, this is the moment for Bitcoin to shine. However, we need real data to back up the narratives. So, Bitcoin will be the biggest question mark in terms of these relationships. We know what should happen but we still need proof.
As things sit, bonds still need to prove they are bottoming. The dollar is at critical support while stocks are bumping up against resistance. Bitcoin is working on a potential bottom and commodities have pulled back to support.
There are a number of things to be excited about but a few things that feel like they need more time as well. Though not fun, patience may be our best friend.