Hello everyone! I hope you are all doing well. This update summarizes my recent market outlook and ideas, reviewing what has gone right or wrong, and considering what could lie ahead.
In one of my latest posts I said: 'Although in the short-term sentiment has turned bullish, hence a 10% correction is possible, we don’t think that a new bear market is in the cards until stocks make new all-time highs.' As some of you might already know, I've had a bullish outlook since Q4 2022, but I'm not a permabull. A few months ago, I started talking about a correction when the SPX was around 4450, and I said a correction was possible but overall things remained bullish. It was hard to turn bearish without confirmation, and that was correct as the SPX rallied up to 4600. People had started turning more bullish, which was bearish, but we weren’t in a frenzy. As we hadn’t reached that euphoric phase and most remained neutral or bearish, it’s hard for me to be very bearish. That's why I consider this more of a correction than a new bear market. Let me be clear - so far in 2023, we've had a bull market, not a bear market rally. Whether this turns into a new bear market is a different story.
Review of Recent Trading Ideas
In recent weeks I didn't have time to share new trading ideas. I only mentioned on Twitter the potential for further downside, without any deep analysis. For now, I think it's best to stay bearish without shorting, and look to buy the dip lower. I expect a bottom around 3950-4250. Of course it’s possible that a new bear market has begun, and that we will make new lows - something I consider possible. We could also be in a huge range, which means that we could retest the lows in stocks, and then begin a proper new bull market. However, I want to take it step by step, and not look that far ahead.
For crypto, I shared several ideas - some did well, others not at all. Many crypto stocks rallied hard, GBTC did well, some crypto assets too, but it didn't last. After sideways movement, things have reversed. Not only reversed but it looks like a nice leg down has begun, potentially a new bear market. My view is we had the first bear market bottom in Nov 2022, a bullish phase, but could now be back in a bear phase. Like most crypto cycles, we get a bull run, weird sideways movement, one last capitulation, and then the bull run continues. I still believe that we will see a Bitcoin spot ETF in 2023 or 2024 for reasons mentioned before, but until then I had also mentioned the dangers that could push crypto prices lower. Crypto markets are still trying to reconfigure themselves post-2022, with pending court cases and bankruptcies, tons of scams, and a search for market fit. I think the next 6-12 months will be crucial to get through the negatives and plant the seeds for the new bull market. However, the new bull market will likely begin before all the bad stuff is resolved, and that's why we need to stay alert and buy the dip when the time comes.
Current Market Assessment - Crypto
Yesterday we saw unprecedented volatility and downside in crypto markets, especially in derivatives. This seems anomalous given the previously subdued volatility and tight range. In a statistically extremely rare event, BTC and ETH prices collapsed dramatically, falling 6-8 standard deviations from their 20-50 day ranges.
Given the unprecedented nature of the drop, the bottom may not be in place yet. However, with oversold conditions, downside may be limited near-term. Most similar drops occurred in bear or sideways markets, followed by consolidation and then lower prices.
With funding rates reset near zero, volatility subsiding from its spike, and major gaps filled, further downside may be limited short-term. The most likely scenarios seem to be choppy consolidation between $25.5-27.5k for BTC and $1,650-1,750 for ETH over the coming weeks before directional conviction returns. Trying to call the exact bottom after such an anomalous move is difficult. ETH now appears relatively stronger than BTC, along with many other crypto assets. However, funding, premiums and other data don't indicate the move down is over. How low we could go is unknown, as the market could drop anywhere from 22.5-23.5k before bottoming, or even down to 12-14k. Again it’s too early to call much lower prices or a bottom, so I will analyze the situation step-by-step.
Before we move into stocks, it's good to be aware of all the warning signs preceding the drop, in order to understand why we could go lower and in order to avoid losing money in the future in similar situations: a) high funding rates - the highest in months, b) derivatives open interest 50% higher than at the Nov 2021 ATH relatively, c) USDT trading at a discount while supply kept falling, indicating capital leaving crypto, d) Lack of reaction to bullish news like the Ripple court win.
Current Market Assessment - Stocks
Stocks continue looking weak and more downside may occur near-term. We don't expect equities to fall too much lower currently, however a substantial drop like in crypto would not be implausible. Numerous stocks exhibit similar patterns. Certain indices either reached new highs or approached peaks, but have since retracted below those levels. Some indices reveal significant untested zones at lower levels, hinting the market may decline there.
Technology ETFs show some commonalities. We notice analogous patterns in individual stocks too. Various shares display weakness upon reaching pivotal levels, which may translate into more declines. However, fragility exists outside tech too. Small caps remain fragile, potentially falling 15% to fill a major downside gap, potentially led lower by banks again. Although banks rebounded and saw a minor short squeeze, their issues likely persist.
Bonds and Currencies
Bonds appear close to bottoming after historic selloffs, though yields could spike higher once more before reversing lower. The recommendation is not to go long bonds yet, but wait for this final dip, as the multi-year downtrend looks nearly exhausted. After yields potentially rise 0.2-0.4% more, attractive entry points for long-term bonds may emerge. Real yields are extremely positive and Treasuries offer relative value.
The US dollar index has rallied over 15% since its 2021 bottom, and could make another push near-term before topping out. While further overseas turmoil could extend its run, extreme overvaluation suggests limited additional upside and a potential retest of the 99 level. The Fed’s tightening supports the dollar currently, but easing inflation reduces the need for further hikes and a potential deflationary shock could force the Fed to cut sooner than many expect.
As policy divergence between the Fed and other central banks fades, so should the dollar's yield advantage. The dollar could keep rising if foreign yields drop faster than US yields, as these economies are weaker. Gold faces some US dollar pressure near-term, but is expected to find support and start recovering medium-term. Gold could test down to $1,800/oz before reversing higher. As a safe haven hedge against policy errors, gold could rally even if the USD stays strong, especially if bond yields fall.
Summary
In summary, while I maintain a cautiously bullish medium-term outlook, the markets face elevated risks and volatility in the near future. Equities and cryptos could see additional downside before finding bottoms. Bonds and gold appear attractive at current levels for long-term investors. However, further dollar strength may continue pressuring assets short-term. I will be monitoring price action closely, looking for clear reversal signals before adopting more directional positioning. Patience and prudence remain prudent until greater conviction emerges. The path forward promises to be challenging yet filled with potential opportunities for those able to adapt and evolve. As always, risk management and capital preservation remain paramount.
In one of my latest posts I said: 'Although in the short-term sentiment has turned bullish, hence a 10% correction is possible, we don’t think that a new bear market is in the cards until stocks make new all-time highs.' As some of you might already know, I've had a bullish outlook since Q4 2022, but I'm not a permabull. A few months ago, I started talking about a correction when the SPX was around 4450, and I said a correction was possible but overall things remained bullish. It was hard to turn bearish without confirmation, and that was correct as the SPX rallied up to 4600. People had started turning more bullish, which was bearish, but we weren’t in a frenzy. As we hadn’t reached that euphoric phase and most remained neutral or bearish, it’s hard for me to be very bearish. That's why I consider this more of a correction than a new bear market. Let me be clear - so far in 2023, we've had a bull market, not a bear market rally. Whether this turns into a new bear market is a different story.
Review of Recent Trading Ideas
In recent weeks I didn't have time to share new trading ideas. I only mentioned on Twitter the potential for further downside, without any deep analysis. For now, I think it's best to stay bearish without shorting, and look to buy the dip lower. I expect a bottom around 3950-4250. Of course it’s possible that a new bear market has begun, and that we will make new lows - something I consider possible. We could also be in a huge range, which means that we could retest the lows in stocks, and then begin a proper new bull market. However, I want to take it step by step, and not look that far ahead.
For crypto, I shared several ideas - some did well, others not at all. Many crypto stocks rallied hard, GBTC did well, some crypto assets too, but it didn't last. After sideways movement, things have reversed. Not only reversed but it looks like a nice leg down has begun, potentially a new bear market. My view is we had the first bear market bottom in Nov 2022, a bullish phase, but could now be back in a bear phase. Like most crypto cycles, we get a bull run, weird sideways movement, one last capitulation, and then the bull run continues. I still believe that we will see a Bitcoin spot ETF in 2023 or 2024 for reasons mentioned before, but until then I had also mentioned the dangers that could push crypto prices lower. Crypto markets are still trying to reconfigure themselves post-2022, with pending court cases and bankruptcies, tons of scams, and a search for market fit. I think the next 6-12 months will be crucial to get through the negatives and plant the seeds for the new bull market. However, the new bull market will likely begin before all the bad stuff is resolved, and that's why we need to stay alert and buy the dip when the time comes.
Current Market Assessment - Crypto
Yesterday we saw unprecedented volatility and downside in crypto markets, especially in derivatives. This seems anomalous given the previously subdued volatility and tight range. In a statistically extremely rare event, BTC and ETH prices collapsed dramatically, falling 6-8 standard deviations from their 20-50 day ranges.
Given the unprecedented nature of the drop, the bottom may not be in place yet. However, with oversold conditions, downside may be limited near-term. Most similar drops occurred in bear or sideways markets, followed by consolidation and then lower prices.
With funding rates reset near zero, volatility subsiding from its spike, and major gaps filled, further downside may be limited short-term. The most likely scenarios seem to be choppy consolidation between $25.5-27.5k for BTC and $1,650-1,750 for ETH over the coming weeks before directional conviction returns. Trying to call the exact bottom after such an anomalous move is difficult. ETH now appears relatively stronger than BTC, along with many other crypto assets. However, funding, premiums and other data don't indicate the move down is over. How low we could go is unknown, as the market could drop anywhere from 22.5-23.5k before bottoming, or even down to 12-14k. Again it’s too early to call much lower prices or a bottom, so I will analyze the situation step-by-step.
Before we move into stocks, it's good to be aware of all the warning signs preceding the drop, in order to understand why we could go lower and in order to avoid losing money in the future in similar situations: a) high funding rates - the highest in months, b) derivatives open interest 50% higher than at the Nov 2021 ATH relatively, c) USDT trading at a discount while supply kept falling, indicating capital leaving crypto, d) Lack of reaction to bullish news like the Ripple court win.
Current Market Assessment - Stocks
Stocks continue looking weak and more downside may occur near-term. We don't expect equities to fall too much lower currently, however a substantial drop like in crypto would not be implausible. Numerous stocks exhibit similar patterns. Certain indices either reached new highs or approached peaks, but have since retracted below those levels. Some indices reveal significant untested zones at lower levels, hinting the market may decline there.
Technology ETFs show some commonalities. We notice analogous patterns in individual stocks too. Various shares display weakness upon reaching pivotal levels, which may translate into more declines. However, fragility exists outside tech too. Small caps remain fragile, potentially falling 15% to fill a major downside gap, potentially led lower by banks again. Although banks rebounded and saw a minor short squeeze, their issues likely persist.
Bonds and Currencies
Bonds appear close to bottoming after historic selloffs, though yields could spike higher once more before reversing lower. The recommendation is not to go long bonds yet, but wait for this final dip, as the multi-year downtrend looks nearly exhausted. After yields potentially rise 0.2-0.4% more, attractive entry points for long-term bonds may emerge. Real yields are extremely positive and Treasuries offer relative value.
The US dollar index has rallied over 15% since its 2021 bottom, and could make another push near-term before topping out. While further overseas turmoil could extend its run, extreme overvaluation suggests limited additional upside and a potential retest of the 99 level. The Fed’s tightening supports the dollar currently, but easing inflation reduces the need for further hikes and a potential deflationary shock could force the Fed to cut sooner than many expect.
As policy divergence between the Fed and other central banks fades, so should the dollar's yield advantage. The dollar could keep rising if foreign yields drop faster than US yields, as these economies are weaker. Gold faces some US dollar pressure near-term, but is expected to find support and start recovering medium-term. Gold could test down to $1,800/oz before reversing higher. As a safe haven hedge against policy errors, gold could rally even if the USD stays strong, especially if bond yields fall.
In summary, while I maintain a cautiously bullish medium-term outlook, the markets face elevated risks and volatility in the near future. Equities and cryptos could see additional downside before finding bottoms. Bonds and gold appear attractive at current levels for long-term investors. However, further dollar strength may continue pressuring assets short-term. I will be monitoring price action closely, looking for clear reversal signals before adopting more directional positioning. Patience and prudence remain prudent until greater conviction emerges. The path forward promises to be challenging yet filled with potential opportunities for those able to adapt and evolve. As always, risk management and capital preservation remain paramount.
Comment:
Hello everyone! A quick update on my views... My bearish outlook on stocks has not entirely played out as I anticipated, but the market does seem to be trending in that direction overall. The S&P 500 now appears on track to reach my target of 3900-4000. My views on Bitcoin and bonds did not pan out, but my calls on gold and the US dollar have been fairly accurate. As things currently stand, I believe bonds could move lower, the dollar higher, and gold higher going forward. I'll share a more detailed analysis on those asset classes soon. Let me know if you have any other questions!