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Is The Worst Behind Us?
Is The Worst Behind Us?
Authored by Lance Roberts via RealInvestmentAdvice.com,
Monetary Support Suggests Bear Market Is Possibly Over
Could…
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Authored by Lance Roberts via RealInvestmentAdvice.com,
Monetary Support Suggests Bear Market Is Possibly Over
Could massive monetary support have softened the deep bear market many expected? It is an interesting question. Particularly given the Fed has hiked rates at one of the most aggressive paces in history. Combined with inverted yield curves, surging debt levels, and weak economic data, a recession and bear market seem assured.
I always shudder at the four most dangerous words in investing, “this time is different.“ However, could the massive amount of monetary support combined with trillions in Government spending change historical outcomes?
One of my favorite Twitter follows, @MichaelAArouet, recently posted a compelling question.
“What are the odds that the fastest tightening cycle combined with highest debt/GDP level will end up in a soft landing?”
Here is the chart to support his question.
What is clear is that since 1981, the Federal Government has been on a rampant spending spree. To Michael’s point, low-interest rates supported increasing debt levels, and previous rate hike cycles inevitably ended in recession. Such is logical given that rate increases divert economic spending to debt service.
Such is seen in the chart below, which shows that increased debt levels subsequently lower economic growth rates. (The chart uses data based on CBO projections for debt levels and the BEA projections for potential inflation-adjusted GDP.)
While politicians consistently focus on spending more money to help the citizenry, the outcomes have been far less favorable. As discussed in “Taking Risk Is No Longer Necessary,” since 1982, economic prosperity has shifted from the middle class to the top 10% of income earners.
This shift from the middle class, combined with the massive fiscal and monetary supports of 2020 and 2021, introduces an exciting dynamic concerning Michael’s question. One issue many may be overlooking is that despite higher rates, the economy, and by extension, the stock market, maybe more resilient than expected.
Monetary Support Is Still High
One aspect of monetary support that much of the mainstream media overlooks was the massive Inflation Reduction Act of $1.7 Trillion that was on top of the more than $5 Trillion in direct stimulus payments during the Pandemic era.
Beginning in 2000, the “money supply” as a percentage of GDP grew sharply, with each Administration ratcheting up debt to pay for politically driven agendas. However, in 2020, monetary support changed radically by sending checks directly to households. That resulted in both a “surge” in economic activity and inflation due to “reopening” from an artificially manufactured “shutdown.”
As shown, M2, a measure of monetary liquidity, is still highly elevated as a percentage of GDP. This “pig in the python” still moves through the economic system. The massive deviation from previous growth trends will require an extended time frame for reversion. Such is why calls for a “recession” have been early, and the data continues to surprise economists.
Federal Spending Ramps Up
However, another overlooked aspect of monetary support could keep the economy from a more profound recessionary drag. In 2022 the Biden Administration was finally able to force through $1.7 Trillion in Federal spending in the Inflation Reduction Act. Those funds are getting spent in 2023 to start various projects, which will provide economic support in the near term, regardless of their success or failure.
In the first quarter of 2023, Federal spending increased by 3% on a quarter-over-quarter basis. Using that increase as a baseline, we can project federal spending through the end of the year, which will eclipse $7 Trillion at the current run rate. Of course, if the current Republican-controlled house can negotiate some spending cuts while raising the debt ceiling, that number will decline.
The point here is that while many economists and analysts are predicting a sharp slowdown and recession later this year, which is indeed possible, there is still a lot of liquidity supporting economic activity in the near term.
Is The Worst Behind Us?
As investors, we must ask whether the market suggests the worse is behind us. Since October, stocks have been in a decent rally, with the Nasdaq leading the charge in 2023. That rally is noteworthy because the stock market leads the economy by 6-9 months.
However, this is the dichotomy that investors currently face. We have repeatedly noted the various recessionary indicators such as inverted yield curves, the 6-month rate of change of the Leading Economic Index, and our Economic composite. These indicators have a flawless track record of predicting recessions over time. I have shown both the LEI rate-of-change and the Economic Composite below. As noted, the current index readings are at levels consistent with recessions since 1974.
Given that economic data is primarily lagging, it will be some time before we know whether the current readings coincided with a recessionary slowdown. However, as noted by the two horizontal lines, outside of the 2020 and 2008 recessions, current readings are near levels that previously denoted recessionary lows.
If such is the case, it is possible the recent rally in stocks, a leading indicator, combined with the ongoing monetary supports, suggests we may start to see some improvement in the economic data. If such is the case, then on an inflation-adjusted basis, the corrective market drawdown did achieve historical norms for recessionary periods.
Furthermore, the correction process may be complete as it held critical support at the 200-week moving average. Such remains support for the market since the 2009 lows. Again, if we see some improvement in sentiment-driven and data-driven surveys, such will confirm the market is leading the economic progress.
Conclusion
There are many arguments against the current market rally, given the lag effect of the Fed’s most aggressive rate hiking campaign since the 1970s. Furthermore, those rate hikes, and much tighter bank lending standards, will eventually reduce consumer spending. Such was the point made in “NFIB Sends Recession Alert.” To wit.
“However, tighter bank lending standards have always been a strong “recession alert” signal as it correlates with changes in retail sales. (Retail sales comprise roughly 40% of PCE, which is 70% of the GDP calculation.)”
I am not suggesting the markets, and the economy, won’t potentially struggle in the months ahead. However, we could avoid a deep economic due to the still massive amounts of monetary support in the system.
These competing forces will make investing more difficult until those monetary excesses reverse.
One thing is for sure. The volatility we have seen in the markets over the last year will likely continue. Investors should expect lower rates of future returns. Of course, that will result from much less monetary support and lower economic growth rates resulting from increased debt levels.
But that is an article for next time.
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Lights Out for Stocks and Bonds? Not So Fast.
The stock market suddenly has the look of a wounded prize fighter. And the bond market is bordering on being dysfunctional. In a word, the market is…
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The stock market suddenly has the look of a wounded prize fighter. And the bond market is bordering on being dysfunctional. In a word, the market is disoriented. Disorientation leads to mistakes.
Don't be fooled. From an investment standpoint, this is one of those periods where those who stay vigilant and pay attention to developments will be in better shape than those who remain confused by circumstances.
As I noted last week: "The relationship between interest rates and stocks is about to be tested, perhaps in a big way. Observe the tightening of the volatility bands (Bollinger Bands) around the New York Stock Exchange Advance Decline line ($NYAD) and the major indexes. This type of technical development reliably predicts big moves. The real arbiter may be the US Treasury bond market. And the place where a lot of the action may take place once bonds decide what to do next may be the large-cap tech stocks. Think QQQ."
Yeah, buddy!
Bond Yields Trade Outside Normal Megatrend Boundaries
Big things are happening in the bond market, which could have lasting effects on stocks and the US economy.
I've been expecting a big move in bond yields, noting recently that yields on the 10-Year US Treasury Yield Index ($TNX) were "on the verge of breaking above long-term resistance," while adding that if such a move took place, it "would likely be meaningful for all markets; stocks, commodities, and currencies."
Well, it happened; after the FOMC meeting and Powell's post-mortem (uh, press conference), TNX blew out all expectations and broke above the 4.4% yield area in a big way, marking their highest point since 2007. It was such a big move that it may be an intermediate-term top. At one point in overnight trading on September 21, 2023, TNX hit the 4.5% level. But the current selling in bonds is way overdone, which means that at least a temporary drop in yields is on the cards.
Here's what I mean. The price chart above portrays the relationship between TNX and its 200-day moving average and its corresponding Bollinger Bands. As I noted in my recent video on Bollinger Bands, this is a crucial indicator for pointing out trends that have gone too far and are ripe for a reversal.
In this case, TNX blew out above the upper Bollinger Band, which is two standard deviations above the 200-day moving average. That move is the magnitude of a Category 5 hurricane on steroids and amphetamines. It's also unlikely to remain in place for long unless the market is completely broken.
The price chart suggests we may see a similar situation to what we saw in October 2022 when TNX made a similar move before delivering a nifty fall in yields, which also marked the bottom for stocks.
Meanwhile, as described below, the S&P 500 ($SPX) is reaching oversold levels not seen since the October 2022 and the March 2023 market bottoms.
Stay awake.
Oil Holds Up Better Than QQQ For Now
A great way to regroup after a tough trading period is to first look for areas of the market that are exhibiting relative strength. Currently, the oil sector fits the bill. Second, it pays to look for beaten-up sectors where recoveries are happening the fastest. At this point, it's still early for that part of the equation to develop, as too many traders are still shell-shocked.
Starting with a look at West Texas Intermediate Crude ($WTIC), prices are holding above $90 as the supply for diesel and fuel is well below the five-year average. And yes, U.S. oil supplies continue to tighten while the weekly rig count falls.
The NYSE Oil Index ($XOI), home to the big oil companies such as Chevron Texaco (CVX), had a mild reaction to the heavy selling we saw in the rest of the market. XOI looks set to test its 50-day simple moving average in what looks to be a short-term pullback.
Chevron's shares barely budged earlier in the week despite an ongoing, albeit short-lived strike by natural gas workers at its Australian facilities. That's a strong showing of relative strength. You can see that short sellers are trying to knock the stock down (falling Accumulation/Distribution line), but buyers are not budging as the On Balance Volume (OBV) line is holding steady.
On the other hand, the very popular trading vehicle the Invesco QQQ Trust (QQQ) broke below the key support level offered by the $370 price point and its 20 and 50-day simple moving averages. This is an area that I highlighted here last week as being critical support. It now faces a test of the support area at $355. A break below that would likely take QQQ and the rest of the market lower.
An encouraging development is that the RSI for QQQ is nearing 30, which means it's oversold. Let's see what happens next. You can also see a similar pattern in the ADI/OBV indicators to what's evident in CVX above, which suggests that when the shorts get squeezed, it could be an impressive move up.
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The Market's Breadth Breaks Down and Heads to Oversold Territory
The NYSE Advance Decline line ($NYAD) finally broke below its 20 and 50-day simple moving averages and is headed toward an oversold reading on the RSI, which is approaching the 30 area.
The Nasdaq 100 Index ($NDX) followed and is not testing the 14500–14750 support area. ADI is falling, but OBV is holding up, which means we will likely see a clash between short sellers and buyers at some point in the future.
The S&P 500 ($SPX) is in deeper trouble as it has broken below the key support at 4350 and its 20 and 50-day moving averages. On the other hand, SPX closed below its lower Bollinger Band on September 22, 2023, and is nearing an oversold level on RSI. Still, the selling pressure was solid as ADI and OBV broke down.
VIX Remains Below 20
The Cboe Volatility Index ($VIX) is still below the 20 area but is rising. A move above 20 would be very negative.
When VIX rises, stocks tend to fall as it signifies that traders are buying puts. Rising put volume is a sign that market makers are selling stock index futures in order to hedge their put sales to the public. A fall in VIX is bullish as it means less put option buying, and it eventually leads to call buying, which causes market makers to hedge by buying stock index futures, raising the odds of higher stock prices.
Liquidity is Tightening Some
Liquidity is tightening. The Secured Overnight Financing Rate (SOFR) is an approximate sign of the market's liquidity. It remains near its recent high in response to the Fed's move and the rise in bond yields. A move below 5 would be bullish. A move above 5.5% would signal that monetary conditions are tightening beyond the Fed's intentions. That would be very bearish.
To get the latest information on options trading, check out Options Trading for Dummies, now in its 4th Edition—Get Your Copy Now! Now also available in Audible audiobook format!
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Joe Duarte
In The Money Options
Joe Duarte is a former money manager, an active trader, and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best-selling Trading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.
The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has also been recommended as a Washington Post Color of Money Book of the Month.
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Bitcoin Mining Can Reduce Up To 8% Of Global Emissions: Report
Bitcoin Mining Can Reduce Up To 8% Of Global Emissions: Report
Authored by Ezra Reguerra via CoinTelegraph.com,
A paper published by the…
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Authored by Ezra Reguerra via CoinTelegraph.com,
A paper published by the Institute of Risk Management (IRM) concluded that Bitcoin has the potential to be a catalyst for a global energy transition.
IRM Energy and Renewables Group members Dylan Campbell and Alexander Larsen published a report titled “Bitcoin and the Energy Transition: From Risk to Opportunity.”
The paper argued that while BTC was perceived as a risk because of its energy consumption, it can also catalyze energy transition and lead to new solutions for energy challenges worldwide.
Within the report, the authors also highlighted the important function of energy and the increasing need for reliable, clean and more affordable energy sources.
Despite the criticisms of Bitcoin’s energy intensity, the study provided a more balanced view of Bitcoin by showing the potential benefits BTC can bring to the energy industry.
Amount of vented methane that can be used in Bitcoin mining. Source: IRM
According to the report, Bitcoin mining can reduce global emissions by up to 8% by 2030. This can be done by converting the world’s wasted methane emissions into less harmful emissions. The report cited a theoretical case saying that using captured methane to power Bitcoin mining operations can reduce the amount of methane vented into the atmosphere.
The paper also presented other opportunities for Bitcoin to contribute to the energy sector.
“We have shown that while Bitcoin is a consumer of electricity, this does not translate to it being a high emitter of carbon dioxide and other atmospheric pollutants. Bitcoin can be the catalyst to a cleaner, more energy-abundant future for all,” the authors wrote.
According to the report, Bitcoin can contribute to energy efficiency through electricity grid management by using Bitcoin miners and transferring heat from miners to greenhouses.
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Crypto traders shift focus to these 4 altcoins as Bitcoin price flatlines
Bitcoin’s tight range trading points to a potential range expansion and that could trigger a trending move in LINK, MKR, ARB, and THETA.
…
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Bitcoin’s tight range trading points to a potential range expansion and that could trigger a trending move in LINK, MKR, ARB, and THETA.
Bitcoin (BTC) has been trading in a tight range for the past three days even as the S&P 500 fell for the last four days of the week. This is a positive sign as it shows that cryptocurrency traders are not panicking and rushing to the exit.
Bitcoin’s supply seems to be gradually shifting to stronger hands. Analyst CryptoCon said citing Glassnode data that Bitcoin’s short-term holders (STHs), investors who have held their coins for 155 days or less, hold the least amount of Bitcoin supply in more than a decade.
In the short term, the uncertainty regarding Bitcoin’s next directional move may have kept traders at bay. That could be one of the reasons for the subdued price action in several large altcoins. But it is not all negative across the board. Several altcoins are showing signs of a recovery in the near term.
Could Bitcoin shake out its slumber and start a bullish move in the near term? Can that act as a catalyst for an altcoin rally? Let’s study the charts of the top-five cryptocurrencies that may lead the charge higher.
Bitcoin price analysis
The bulls have managed to sustain the price above the 20-day exponential moving average ($26,523) but they have failed to start a strong rebound. This indicates a lack of demand at higher levels.
The flattish 20-day EMA and the relative strength index (RSI) near the midpoint show a status of equilibrium between the buyers and sellers. A break below the 20-day EMA will tilt the advantage in favor of the bears. The BTC/USDT pair could then descend to the formidable support at $24,800.
Alternatively, if the price rises from the current level and climbs above the 50-day simple moving average ($26,948), it will signal that buyers are back in the driver's seat. The pair may then attempt a rally to the overhead resistance at $28,143.
BTC has been trading below the moving averages on the 4-hour chart but the bears have failed to start a downward move. This suggests that selling dries up at lower levels. The bulls will try to propel Bitcoin price above the moving averages. If they manage to do that, the pair could rally to $27,400 and subsequently to $28,143.
If bears want to seize control, they will have to sink and sustain BTC price below $26,200. That could first yank it down to $25,750 and then to the $24,800-support.
Chainlink price analysis
Chainlink (LINK) surged above the downtrend line on Sep. 22, indicating a potential trend change in the near term.
The moving averages have completed a bullish crossover and the RSI is in positive territory, indicating that the buyers have the upper hand. On any correction, the bulls are likely to buy the dips to the 20-day EMA ($6.55). A strong rebound off this level will suggest a change in sentiment from selling on rallies to buying on dips.
The bulls will then try to extend the up-move to $8 and eventually to $8.50. If bears want to prevent the up-move, they will have to sink and sustain the LINK/USDT pair below the 20-day EMA.
Both moving averages are sloping up on the 4-hour chart and the RSI is in the positive zone. The bulls have been buying the dips to the 20-EMA indicating a positive sentiment. If LINK price rebounds off the 20-EMA, $7.60 will then be the upside target to watch.
Contrary to this assumption, if Chainlink's price continues lower and skids below the 20-EMA, it will signal profit-booking by the bulls. LINK may then retest the breakout level from the downtrend line. The bears will have to sink it below $6.60 to be back in control.
Maker price analysis
Maker (MKR) turned down from the overhead resistance at $1,370 on Sep. 21, indicating that the bears are trying to defend the level.
The 20-day EMA ($1,226) is the support to watch for on the downside. If the price rebounds off this level, it will suggest that lower levels continue to attract buyers. The bulls will then make one more attempt to drive MK price above the overhead resistance. If they can pull it off, the MKR/USDT pair could accelerate toward $1,759.
Conversely, if the bears sink the price below the 20-day EMA, it will suggest that the bullish momentum has weakened. That could keep the pair range-bound between $980 and $1,370 for a few days.
The moving averages on the 4-hour chart have flattened out and the RSI is just below the midpoint, indicating a balance between supply and demand. If buyers shove the price above $1,306, MKR pric could sprint toward $1,370.
Instead, if the price turns down and breaks below $1,264, it will suggest that the selling pressure is increasing. That could clear the path for a further decline to $1,225. A slide below this support may tilt the short-term advantage in favor of the bears.
Arbitrum price analysis
Arbitrum (ARB) is in a downtrend. The bears are selling on rallies to the 20-day EMA ($0.85) but a positive sign is that the bulls have not ceded much ground. This suggests that the bulls are trying to hold on to their positions as they anticipate a move higher.
The RSI has risen above 40, indicating that the momentum is gradually turning positive. If buyers kick the price above the 20-day EMA, it will suggest the start of a sustained recovery. The ARB/USDT pair could first rally to the 50-day SMA ($0.95) and thereafter to $1.04.
The support on the downside is $0.80 and then $0.78. Sellers will have to drag ARB price below this zone to make room for a retest of the support near $0.74. A break below this level will indicate the resumption of the downtrend.
The 4-hour chart shows that the bears are selling the rallies to the downtrend line. The bears pulled the price below the moving averages but could not sink ARB pric below the immediate support at $0.81. This suggests that the bulls are trying to form a higher low.
Buyers will again try to propel the price above the downtrend line. If they succeed, Arbitrum price is likely to start a strong recovery toward the psychological level of $1. Contrarily, a break below $0.81 can tug ARB price to $0.78 and subsequently to $0.74.
Theta Network price analysis
Theta Network (THETA) soared above the 20-day EMA ($0.61) on Sep. 23, indicating that the bulls have absorbed the supply and are attempting a comeback.
The bears have pulled the price back below the 50-day SMA ($0.64) but the bulls are expected to defend the 20-day EMA. If THETA price turns up from the current level and climbs above the 50-day SMA, it will enhance the prospects of a retest of $0.70.
This is an important level to keep an eye on because if it is scaled, the THETA/USDT pair may reach $0.76. This positive view will invalidate in the near term if the price turns down and plunges below the 20-day EMA. That opens the door for a potential retest of $0.57.
The 4-hour chart shows that the bears are protecting the overhead resistance at $0.65. If buyers want to sustain the bullish momentum, they will have to drive THETA price above $0.65. If they do that, the pair is likely to start a new up-move toward $0.70.
The 20-day EMA is the important support to watch for on the downside. If bears sink the price below this support, it will indicate that the bulls are closing their positions. The pair may then descend toward the support at $0.58.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
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