Bloodgood's Notes #131
Sell in May and go away strategy wins again, CPI and FOMC meetings will shake the markets tomorrow and more
Fundamental Overview
We’ve had a choppy Q2 so far, but that’s not surprising given how bitcoin’s seasonality has developed over the years. Typically, Q2 and Q3 are way worse than Q1 and Q4, which has in part led to the popular adage “sell in May and go away” being applied to crypto. To be exact, though, it should be “sell a bit before May,” since BTC tends to have worse performance in May compared to the S&P 500, where selling in May would make more sense.
In any case, I would caution against putting too much weight on seasonality—especially with an asset class that’s been around for a relatively short time and whose market dynamics have been transformed drastically multiple times within that short history—but it’s just one datapoint among others to consider. We all know that summer isn’t the most exciting time for crypto anyway, but it’s worth noting that ETFs could further strengthen bitcoin’s correlation with stocks, which isn’t a bad thing given that we’re in an election year, when Q3 seasonality is significantly better for equities.
If you’re waiting for some headlines to get us out of this chop, then this week is a good time to pay attention. We’ve got the May CPI and a FOMC meeting tomorrow, with PPI coming in on Thursday. While no one is expecting an interest rate change for the FOMC, the crucial thing will once again be the Fed’s signaling regarding potential cuts in July and September. This will be important because the odds for the September 18 Fed meeting are split very close to 50/50 between a cut (with almost 5% for two cuts) and holding rates steady. If there are any comments or inflation data that influence these odds, that will show up in the charts as well.
Bitcoin
Bitcoin drops overnight, catching many traders off guard.
We woke up to see another fakeout as the BTC price dropped way below the breakout level. Those who read last week’s issue were warned about a potential fakeout, and it happened again. If you want to be safe, you will wait for weekly confirmations. At the time of writing, Bitcoin is trading around $67,000 after printing a double top pattern on the weekly chart, which is usually a strong bearish signal. On the daily, we can see a clean breakdown and almost no fight from the bulls, since there was no bounce from the drop that happened a few days ago.
The next target here is the daily support that lies at $64,650, and in case we test it, we will want to see a strong bounce off it. If not, we could have a miserable summer.
SPX, Gold, and DXY
While crypto drops lower, stocks make new highs.
It seems that the strength that came from the wicks below the breakout level being bought up triggered a rally to new highs. The uptrend continues with full force.
Gold saw a similar fate to crypto.
A big drop on the daily chart led gold to the range low where we are currently seeing a reaction from bulls stepping in to defend the level. There is no need to explain this, but losing this level might lead us back down towards the $2,000 level and retrace this whole uptrend.
And if you have been reading my newsletter for some time, then you already know... if crypto goes down, DXY goes up, and vice versa.
In the last three days, DXY reclaimed its major 105 level and looks stronger than ever. There is a possibility of reaching the 105.77 level within the next few days, and if it breaks above, then risk-on assets will be in trouble.
Ethereum
As expected, Ethereum takes a hit following Bitcoin's 2021 ATH rejection.
Looking at the weekly chart, we can see that Ethereum tried to break above the $4k level twice, first in March and then at the end of June. There is a big gap to its next weekly support at $3,300, which could be tested if Bitcoin drops to its daily support. It goes without saying that a higher low must be printed on the weekly and support defended in order to see continuation.
On the ETH/BTC chart, we can see that it has dropped back to its green zone, while the infamous 0.055 BTC level was rejected.
Bulls will have to do their work on both the BTC and USDT pairs.
Concluding notes
As the Ether ETFs are getting closer to launch—not that there’s a date just yet, but it should be soon in any case—there are a lot of takes on how the fact that staking won’t be available is going to influence ETF flows. Since ETH has a decent ~3.5% (basically risk-free) yield from staking, the fact that ETF buyers will be missing out on that has made some sceptical regarding future inflows. This argument makes sense on the surface, but there’s also a more optimistic perspective to this. First of all, ETH isn’t exactly the kind of asset that TradFi will be buying for a 3.5% yield—they are likely to see it as analogous to a tech stock, which means that they’ll be looking at much bigger potential returns, compared to which the yield will be a rounding error. Second, once there are ETFs that do offer staking, which is extremely likely to happen at some point, we’re likely to see another boost in inflows as the issuers go all out with marketing the yield in order to gain as much market share as possible to the new ETFs. All in all, no reason to be too pessimistic about the potential flows.