Bloodgood's Notes #136
Best dip buying opportunity ever or are we going lower? Find the answer in this newsletter.
Fundamental Overview
The Fed unsurprisingly held rates steady at the July 30/31 FOMC, but overall the tone of the press conference was fairly dovish, with Powell making it clear that the recent improvements in inflation look better than last year’s drop in the CPI and that there would be no tolerance for any softening of the labor market. As a result, early morning on Friday, the market was pricing in a 72.5% probability of a 25 bps cut and 27.5% for 50 bps at the September meeting. By the time of writing, though, the odds for 50 bps shot up to over 80% and, unless you’ve been living in a hut on a remote mountaintop, you’ll know that a lot of things happened in the meantime. So, what went wrong?
For one thing, the jobs report was released on Friday and, to put it mildly, it wasn’t good. Unemployment in the U.S. ticked up to 4.3%, the highest it’s been since October 2021, as the economy added only 114k jobs—way below the estimates of 185k. This led to widespread fear of a recession and started putting the market into panic mode, but there wouldn’t have been nearly as much chaos if it weren’t for another, somewhat related factor: the yen carry trade unwinding.
If you’ve mostly spent your time within crypto, this might sound unfamiliar to you, but fortunately it’s fairly simple. The BoJ (Bank of Japan) had extremely low rates for decades and the yen was essentially down-only against the dollar over the past few years. As a result, an easy way to print money was to borrow yen, sell it for USD, and then invest the USD into bonds or stocks. Even by just putting the dollars into treasuries, you’d be earning the interest rate differential by paying 0.1% on your yen loan while earning upwards of 4% on USD. What’s more, since the yen was almost guaranteed to keep losing value, you’d also earn more from the price drop: when, later on, you want to close the trade and buy back the JPY, you’ll have to pay less USD than you got when you sold it.
Now consider that there was a lot of capital doing this and putting on a lot of leverage in the process. But then, the BoJ decides to hike rates to 0.25% last Wednesday, after the yen had already bounced back a bit against the dollar. Coupled with recession fears in the U.S. which put downward pressure on bond yields—thus making the carry trade less profitable—this led to the yen pumping almost 15% from its July low against the dollar. What does this do to the carry trade? Well, three things happen simultaneously: (1) the trade becomes less profitable due to the rate differential narrowing, (2) the yen loan becomes much more expensive as (3) the USD loses value. In a word: rekt. Funds have to unwind fast and they have to sell other assets (primarily stocks) to cover their positions, which leads to the sort of chaos we’ve seen.
Bitcoin
Well... a lot has changed in the last two weeks.
If we were previously discussing whether BTC would break $69k, we are now looking to see if the $51k level will hold. Bitcoin has dropped 30% in the last two weeks due to the turmoil in the stock market. However, the fundamental part doesn’t interest us in this section; here we are looking at the charts. The bottom was formed slightly below $50k, and a bounce is in process. If we want to see continuation soon, we will need BTC to close its weekly candle above the key weekly level at $59k. If not, we might see sub-$50k levels soon.
Since Bitcoin failed to make a higher high on the weekly, we now have three lower highs and three lower lows, indicating that we are still in a downtrend. Until that changes, I am not comfortable looking for longs and will keep waiting until the trend shifts.
SPX, Gold, and DXY
Stocks continue their downward path.
It happened exactly as we predicted after discussing the staircase pattern. Once that pattern is broken, we usually see the price drop to where the pattern started. At the time of writing, SPX is trading below the breakout level at 5261, and bulls will want to break above it and act like this drop didn’t happen. Charts will be interesting to watch this week.
Gold shows strength in uncertain times.
While other assets dropped like there is no bottom, gold held and even made another attempt at the all-time high. Although we didn’t get our chance to bid at the range low, I am still excited to see it trade close to ATH.
DXY continues its path to doom, breaking below the 103.5 level, which we discussed as the last level that must hold if any continuation is to be seen soon. Well... we are past that. DXY has made a new low, and it doesn’t look good, especially given the likely path forward in terms of monetary policy.
Ethereum
Ether drops down to levels not seen since January.
Similarly to BTC, ETH needs to reclaim $2,600, which was the breakout level that led ETH to $4k. If that doesn’t happen, we might just see it test $2k. On the other hand, breaking above that level would lead ETH to $2,800 and then $3,300.
Looking at the ETH/BTC chart, as expected, Ether took a bigger hit and crashed below its current low, touching levels that were not seen since 2020/2021. I will wait another week for the dust to settle and then will comment on our plan. For now, we will want to see ETH reclaim the 0.046 BTC level.
Concluding notes
When it comes to crypto headlines over the past weeks, one thing that grabbed a lot of attention was the Bitcoin 2024 conference in Nashville, as Trump and RFK Jr. delivered strongly pro-crypto speeches. The crowd was particularly enthusiastic when Trump promised to fire Gensler, so much so that even Trump himself was surprised by the extent of the reaction. Right after him, Senator Cynthia Lummis went into a more detailed proposal by presenting the Bitcoin Reserve Bill, which would see the U.S. establish a strategic reserve and purchase program for Bitcoin. Meanwhile, even though the Republicans are definitely putting much more emphasis on crypto in their campaign, the Democrats seem to be warming up to that idea as well, with a growing wing of the party pressuring the leadership to adopt a more pro-crypto stance—hardly a surprise given that 20% of voters in battleground states named crypto as a key issue in the 2024 election. Whether and to what extent the Dems (or Trump, for that matter) follow up on their promises remains to be seen, but it’s clear that crypto is long past the stage of being a fringe issue.