3-Min. Weekly Market Sentiment Wrap-Up — August 20th

Sometimes, friends, clients, connections on social media will reach out to me asking for advice on how to trade. Most people don’t realise that, as opposed to the very smart people that actually understand the world economy, my opinions are not based on convictions. Really, my analysis is just gleaned from conversations with those smart people, and then I just parrot it back.

I think -hope- there’s value in that, though. There’s an instinctive aggregation going on, where I’ll pick up on recurring themes, a general mood, trades made to take advantage of a certain dynamic.

The lack of strong bias is maybe the best thing. There’s no attachment, no ego, just an open-mindedness about what people I respect tell me.

To clarify and reiterate, though, I’m not even trading markets, I just observe and stay the stubborn buy-and-hold investor that accumulates on pull-backs.

The current market is tainted with uncertainty. Not the uncertainty about the future from the first half of 2022, when people reverted to cash and sold risk assets. No. Now people are uncertain both about the risk assets they hold, and about the cash they hold. There’s FUD and FOMO all mixed up.

What are the narratives fueling both sides?

BULLISH: investors aren’t too scared of inflation, anymore. It’s been rising, but seems to not be rising that much more. It’s essentially high but most assume it has peaked or is in the process of peaking. While this might be in no uncertain terms because of a recession, the inflation going down can ease the pressure the Fed imposes on the stock market with its incessant rate hikes. So if we think the Fed will go from hawkish to dovish, we can buy risk assets again. Sure, there’s still Russia-Ukraine, still supply-chain issues, still zero-covid policy in China, still commodity/food stuff issues that will reverberate for a while into our lives but all of that was priced in already. Better to be invested and wait then to miss out.

BEARISH: some of the fundamental issues in the economy were priced in earlier this year, namely the unsurprising inflation rise that will take a long time to fight, and the more unexpected Russia-Ukraine war which will clog the world supply-chains in ways we yet cannot imagine. From currency devaluation, the shift from one power to the other for commercial agreement, trade routes, fertiliser and food stuff but also oil and gaz as we gear ourselves to the winter months, the world is in complete disarray. Investors misunderstand the focus of the Fed which is on fighting inflation and not on helping Wall Street, but also on how long it will take to get inflation under control. The US-China tensions aren’t helping. And, to finish it of, the idea of buying risk in a recession because it could have a ‘positive’ effect on inflation is moronic.

… Are you expecting a bias one way or the other? You won’t find one here.

The one thing I gathered from sophisticated players I talk to on a day-to-day basis (although really focused on crypto) is that retail investors hoping for a straight line bull run back to all-time highs are setting themselves up for disappointment.

The one thing most people seem ok to say is: we might have hit the bottom already.

This is not to say we can’t go back down, retest, even dip a little further down. Or maybe that we won’t go that low. But the idea that we would’ve hit something close to a long-term low point is probabilistically digestible.

Most funds and large investors also look at our market with a long-term horizon. A lot of retail guys are asking ‘was that it?’, ‘should I buy in again’, waiting to see how next week will play out… Argh, that’s not the way to build long-term wealth or a steady portfolio. The feeling is actually that we’re not done with volatility or that we haven’t hit a resolution yet. We will have to wait for -at the very least- until early 2023 to get some clear way out… if we actually are to be on the way out by then.

My perception -based on zero data- is that we will go through an unusual time. I’ve talked about this in previous blog posts: the easy monetary environment of the past 14 years has created a generation of investors used to V-shaped bottoms (quick downs but just as quick recoveries); but that environment has changed quite significantly, there’s still plenty of money around but the supply is going towards less, not more. Essentially, with less easy cash, the investor invests more cautiously.

So I expect a sort of painful and long-lasting sideways market. Something that will test investors’ patience.

In March-May I communicated by bearish bias in the face of stubborn bulls. In June-July, I communicate my cautious bullish bias or at least openness to accumulating in the face of overwhelming pessimism all around. Today, I’m trying to share a careful point on the fact that things aren’t always as binary as up or down — markets can also move sideways, and that might prove to be more painful and more destructive than the typical investor or trader might expect.

But “what about crypto?” I hear you clamor. Same. I honestly thing we shouldn’t be fooling ourselves with decorrelation. While I still vehemently believe in the uncorrelated property of BTC and crypto in the long-run, in the short-term and in the current environment, it’s a proxy for monetary supply and the mood of macro markets. It’s a shame because the value is so much more grand. But it is a purely speculative price action and so linked to investors’ strategies and mood, especially as crypto are traded by more people and more sophisticated groups.

Do you take the bearishness as a reason to wait longer and not buy BTC at 17.8K? If you think that way, I can almost guarantee you’ll miss the bottom. For the long-term investor, it was and might again be a great price to buy. Do you remember looking at BTC in the mid 60Ks and thinking you would “for sure buy bitcoin when it pulls back into the 50Ks”… where are you now, where is that conviction, that enthusiasm? If it’s gone already, you’re reactive and not proactive, and so the bigger chunks of alpha won’t belong to you. You will be condemned to following, always late to the game for some reason.

“The stock market is a device for transferring money from the impatient to the patient.” Warren Buffett …but of course he was also talking about crypto, right? Right?

Maybe the one thing I would venture saying -a concept shared just recently by a friend- is that things are happening or unfolding a lot faster than before. So when I talk about more painful markets or maybe sideways market, I’m not talking about a lost decade situation, maybe it’s just between six months to two years. It’s interesting that it could kind of align with the timeline previous BTC market cycles took, from top to cyclical bottom and then sideways into a renewed (post halving) rally; that is indeed a while away, if we are to repeat previous cycles.

I absolutely love charts. They’re so, well, visual ! And they can encapsulate a whole situation in just one clear level or indicator. Here’s a chart dump:

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The below is my most recent but favourite chart, showing the transition of coins from young/weak hands into older/steadier hands on the bitcoin blockchain. Which one are you? Which side would you like to be on?

This is a beautiful meme about the ETH merge and what many investors buying into the event misunderstand. The network will be secured -but you could also read ‘controlled’- by validators. Those validators are in part some rather large centralised entities that are very much influenceable or might have incentives aligned with regulators rather than the libertarian and laisser-faire ideology crypto ETH investors think they’re buying into. I’m hold a hefty chunk of ETH myself, so I’m not bearish, just saying some people might be buying while wearing rose-tinted glasses (“la fleur au fusil”).

The below shows the expectations by bond markets, typically regarded as the more sophisticated and reliable market to watch, that the Fed will not only ease the rate hikes but start lowering rates.

And this chart -wait, actually three charts- are also somehow telling you that buying into markets at current prices, why maybe not the absolute low, is probably… not… the worst idea? I’ve been buying at least.

Here below is showing the insane, absolutely skyrocketing, price of electricity in France.

And here is Germany getting ready to be a lot poorer and colder this winter. Just a never seen before year-on-year inflation level. Insane. Europe is not looking good right now.

To counter the inflation gloom and doom, the pricing from companies in the US seems to indicate lower prices soon. And inflation seems to always follow that measure. So unless US companies are lying about their plan, we could see inflation head south soon.

Here’s something that should make you pour at least some cash into crypto markets. Why? Because you might be front-running some seriously large investors with deep-pockets, that are gearing up to funnel all that into blockchain, web3, DeFi,… whatever you want to call it.

Here below shows ETH and the net unrealised profit/loss indicating the 1K mark was essentially the absolute capitulation level -but can we capitulate a few times before going back up?

And also this, I really like the Pi Cycle indicator and it seems to be an interesting one to look at, along with the RSI indicator (which I typically only use when there’s a divergence but, here on the weekly, might be a good bottom indicator).

This is an adoption curve graph and you can see BTC in the bottom right. Depends if you think it’s all just a fad or the way to the future.

Disclaimer: none of the information contained here constitutes an offer (or solicitation of an offer) to buy or sell any currency, product or financial instrument, to make any investment, or to participate in any particular trading strategy.