Blockware Intelligence Newsletter: Week 43
Bitcoin on-chain analysis, mining analysis, macro analysis; overview of 6/17/22-6/24/22
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We’ve seen a downtick in oil prices the last two weeks, and while this could help to bring down the prices of goods it is more likely that inflationary pressures will continue to rise.
Bond’s have caught a fairly strong bid this week which helped to alleviate some of the downside pressure for equities.
We are on the lookout for a follow-through day for the market indexes on Friday, this would be a signal that the market is making a legitimate rally attempt.
Hash Ribbon metric continues to signal that a miner capitulation has been underway since June 7th. The end of a miner capitulation historically marks a bear market bottom.
Miners are selling BTC and some are getting their Bitcoin collateralized loans liquidated. Bloomberg, Arcane Crypto, and Coinmetrics are all reporting that miners are selling more than normal.
General Market Update
We’ve seen a solid bounce in the equity market this week, so let’s break down some of the factors which may have caused some buyers to step in.
On the commodity side of things, the weakness in Crude Oil prices is significant to discuss this week. At the time of writing, WTI Crude is down 4.08% on the week to $105 a barrel after nearly hitting $124 last week.
This is following an announcement from the White House to implement a three month pause on Federal gas and diesel taxes in order to incentivize new oil production. While this is unlikely to keep prices down for long, it is the strongest move made by President Biden to lower energy costs thus far.
Keep in mind the most elementary concept of macroeconomics, the supply and demand graph.
Note that the equilibrium price and quantity, or the market price and quantity for a particular good, exists where the supply and demand lines meet. So when supply increases, and that “S” line shifts to the right, the equilibrium price and quantity will shift down the demand curve, causing price to decrease.
The White House is attempting to lower energy prices by incentivizing oil producers to supply more oil to the market. While this does occur naturally in a free market economy, as an increased price of a commodity makes it more profitable to produce, the White House believes more help is needed to speed up this process.
US Crude Oil Production (Bloomberg)
As shown above, the US currently produces about 12,000,000 barrels of oil per day, which is up YTD from 11,800,000 in Q4 2021. But increasing oil production by getting existing drilling pumps back online or installing new ones is an extremely labor, time and capital intensive process.
Therefore, it’s most likely that a three month tax holiday will not be enough to significantly incentivize new production, especially in an environment that is making the cost of capital rise with each Fed rate hike.
So will this lower oil prices and help to bring down CPI to return some confidence to the market? The short answer is most likely no.
Core CPI (CPI minus food and energy) is still at 6.0%, the largest value since 1982. So while yes, energy prices do make up 2.6% of the current CPI number, and energy is an input cost to all goods, the monetary factors for current inflation have a significantly larger impact at the moment.
If Biden’s tax holiday isn’t enough to greatly encourage new oil production, CPI will likely continue to rise.
Since the Fed just recently began quantitative tightening, we’ve seen the first monthly downtick in the M2 money supply since 2010. So we’ve begun to move in the right direction, but there is a lot of ground to cover in withdrawing capital from the economy.
With the ongoing issues in the supply chain, more money competing for less goods will result in increased prices. There are some extremely early signs that we may begin seeing less money competing for less goods, but it is much too early to say if we’ll begin to see CPI falling from this.
In the fixed income markets, we’ve seen bonds catch a bid this week, resulting in a drop in yields.
We discussed the impact that yields have on equity and Bitcoin pricing in this newsletter last week. So now we all know, falling yields is generally good for risk-asset pricing.
That being said, this isn’t the first rally we’ve seen in the bond market in the last few months and thus far, they’ve all turned out to be dead cat bounces.
Above is IEI/HYG, a chart that shows the spread between 3-7 year Treasuries and high-yield corporate debt (junk bonds). If we take a look at this credit spread, we can see that this bond buying has been relatively stronger for Treasury securities, in comparison to junk bonds.
This means that while yes, there is a strong degree of bidding taking place in the bond market, the smart money’s appetite is still shying away from risk-assets, in aggregate.
With a drop in yields, the stock market indexes have, overall, had a strong week. But early in the week we saw the S&P and Nasdaq running into strong sellers around their 10-day EMAs.
On Thursday this changed with the Nasdaq retaking that key moving average which is a bullish signal, in the very short term. It could be that we’re due for a legitimate rally attempt, but keep an eye on the 50-day SMA for a spot of resistance.
If you’re someone who has been trying to buy the bottom of this market, I wanted to include a quote from one of my favorite books, Reminiscences of a Stock Operator by Edwin Lefèvre.
“...prices, like everything else, move along the line of least resistance. They will do whatever comes easiest, therefore they will go up if there is less resistance to an advance than a decline; and vice versa… Therefore the thing to determine is the speculative line of least resistance at the moment of trading; and what he should wait for is the moment when that line defines itself, because that is his signal to get busy.” (Page 121)
What this quote from 1929 explains is that stocks are significantly more likely to continue to follow the trend than they are to break it. With all key moving averages sloped negatively, in ascending order and price unable to make a higher high since November of 2021, the line of least resistance is clearly pointed downwards for the S&P and Nasdaq.
NASDAQ 1D (Tradingview)
So while this bounce could potentially be the bottom, it is much more likely to be a bear market rally followed by continuation to the downside.
But as investors, we should always be prepared to be proven wrong. That proof can only come from price, so be on the lookout for a break above $12,300 on the Nasdaq or $4,200 for the S&P as a signal of a potential bottom.
A break above these levels would not confirm that the bottom is definitely in, but it would make the likelihood significantly larger. True confirmation will take many weeks, if not months, to play out, so there is no need to be diving back in at the first signs of green.
If trading was easy, everyone would do it, the market is designed to get you to make emotional decisions that result in your losses. Patience.
The best performing stock groups of recent have been Chinese and medical names. If this market does indeed go on a multi-week rally here, keep an eye on those groups for the leaders.
Furthermore, we need to be on the lookout for a follow-through day (FTD) in the market. If you don’t recall, this can occur on any of the three major indexes. A FTD can only happen at the earliest on day 4 following an apparent market bottom (Friday is day 5 on the Nasdaq and day 4 for the S&P and DJIA).
On day 4 or beyond, if there’s a day where the index is up >1.5% on volume larger than the previous day, then that day is declared a FTD.
Remember that a FTD is never a guarantee of a new uptrend; “Not every follow-through day starts a bull market, but every bull market starts with a follow-through day.”
Friday appears to be a likely day to see a FTD, but the key will likely be if volume is up or not.
Moving on, the stock, credit and crypto markets WILL bottom before the economy does, and at this point in the bear market, we haven’t officially slipped into recession.
Monitoring the job market is perhaps the best way to understand how far off we are from recession.
I’ve discussed Initial Jobless Claims in this newsletter a few times, but let’s look at a few other metrics that can help us understand the current environment for employment.
US Average Weekly Hours Worked (Bloomberg)
One thing we can look at is the average number of hours being worked per week. This is significant because at the onset of a recession, employers won’t simply begin firing employees en masse.
Generally, it first begins by reducing the number of hours that their existing employees are working. Above you can see that there has been an overall decrease in hours worked, but nothing has changed significantly in 2022.
US Job Openings Rate (Bloomberg)
Alongside reducing the hours worked by current employees, companies will also slowdown hiring before they begin layoffs. As you can see above, this has arguably begun to occur as we saw a fairly significant downtick in the Job Openings Rate in Q1 2022.
But both of these data points are released quarterly, so we will have to wait until July to see how this has played out as of recent.
Overall, if we begin to see increased unemployment, it would be the long awaited signal of stagflation. But as I’ve just discussed, the rippling effects of higher interest rates take time to settle into the real world.
Contrary to popular belief, when the Fed raises interest rates those rates don’t impact people and businesses immediately. People can stomach higher interest payments for a period of time, until finally they are unable to pay.
This is why there is much debate about whether we actually are currently in a recession. A recession and a bear market are much different, and while they often coincide, we need to see a material impact on companies and employment before we can confidently say we’re economically receding.
In the land of crypto-equities, it’s been interesting to see how these stocks have reacted to the bounce in Bitcoin and the market indexes.
The thing to watch is going to be how these equities react around key moving averages, and areas of resistance.
As I’ve discussed here before, these names that are now 60-90% off their highs are going to run into massive overhead supply. These are areas where investors sitting on losses will sell their shares in order to break even.
This will create large areas of resistance and thus, provide us traders and investors with low-risk entry points to make buys. While I personally believe that the buying opportunity for these largely undervalued stocks will be significant, we should be in no rush to jump back in.
But of course, with these names significantly off their highs, we’re in a very good position to dollar-cost average into these types of stocks.
The strongest names in this group are those who are near or above their 21-day EMAs. These are names like: MSTR, COIN, CLSK, BTBT, etc.
Above, as always, is the spreadsheet tracking the weekly performance of several crypto-exposed equities through Thursday’s close. Do note the relative outperformance that BTC has had in comparison to the average crypto-stock and WGMI, the Bitcoin mining ETF.
Weak Miners are Capitulating
As mentioned in previous Blockware Intelligence Newsletters, hash ribbons (chart below) indicate whether miner capitulations are occurring. Miner capitulations are when a significant net % of miners are turning off machines over an extended period of time.
During miner capitulations, miners are not only turning off rigs, but they are likely selling off their BTC treasury, as noted by Bloomberg below. Historically, miner capitulations have been the last leg down in a Bitcoin bear market, as many miners are pro-cyclical. At the start and during the capitulation, sell pressure from weak miners is considerably increasing, but once the capitulation has ended, the network is left with only the strongest miners with the lowest operating expenses. This ultimately ends with less forced sell pressure on a day-by-day basis.
Not only are miners in aggregate selling more since May, but in June this month, Bitfarms sold 3,000 BTC for $62M to “boost liquidity” and take on a more conservative strategy.
When will the miner capitulation end? It’s hard to tell, but the good news is that it at least has started. These weak miners being purged from the network will eventually be eliminated, ultimately reducing day-to-day sell pressure. However, if the macroeconomic conditions continue to deteriorate with a hawkish federal reserve, then it is possible that Bitcoin experienced another leg down and a mid-generation rig capitulation.
CoinMetrics also has performed interesting on-chain analysis confirming that miners have likely been stepping up their selling instead of holding the coins they mine.
All signs point to Bitcoin being near the end of this bear market that arguably has lasted over a year. With that said, it’s still possible there is still one more major liquidation event.
All content is for informational purposes only. This Blockware Intelligence Newsletter is of a general nature and does consider or address any individual circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal, business, financial or regulatory advice. You should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.
Lots of good material here to help readers form their own thesis of where Bitcoin is heading.