Markets have begun to enter the bizarre space between rationality and rationalisation as of Friday – if we don’t get a good selloff this coming week there could be illiquidity, low activity and indecision for the next month.
This week saw the re-embrace of risk in the style of the pre-coronavirus market. Soft commodities, oil and equities had a strong week, while precious metals were weak. The VIX was the biggest underperformer.
The US Election
The bookmaker odds for a Trump 2020 election victory were flipped towards Biden this week, during a week of chaos. A lack of action is perceived by the US Federal Government who have their hands tied by the absolute quagmire that is US politics.
Rasmussen Reports counts Black Likely Voter approval of Donald Trump being over 40% reported 6th June.
This figure will, and ought to, shock anybody familiar with the popular narratives. As for veracity, Rasmussen was given mid-tier accuracy amongst pollsters with a bias towards Democrats in 2016 (all pollsters did) and Rasmussen himself has claimed no political fealty on multiple occasions. At the least, they are pro-American, and a black voter base for Trump solves a lot of problems for the United States.
In any case, Goldman Sachs reported a high interest in clients wondering what will happen if Donald Trump loses the election, and this figure may be the one to watch to get ahead of the curve.
Now that the US Equities have completed their technical chart pattern on the daily, the whole market is bizarrely bullish and even hedge funds are reported to be back in buying – it’s about time to question the state of the US equity market.
Taking a look at the market, we can see volatility after it breached 3,100 as well as 3,200 and a zombie, meandering market besides that.
After the volatility of 3,100 failed to materialise in a bearish move it drifted aimlessly before targeting the next level – 3,200 with stopouts likely. After taking 3,200 there is aggressive bearish positioning again afterwards.
Our own signal for pricing had been the S&P500 priced in gold, which has been a more reliable and rational pricing mechanism. We suspect that gold as a reference rate can gain acceptance by allowing traders and funds to look at understandable and meaningful price action against a stable reference rate.
In this case, it has breached the previous lows of 2018 and 2019 (also squeezed through as a false-break on the break in 2020).
The level we liked here to consider selling above was 1.85 (now trading above at 1.9). The problem with the trade is that it has only just breached the levels.
Although this is a technically strong time to try the trade (and a great risk-reward here), it is conceivable that those holding assets stubbornly refuse to sell here (having only just entered the market).
When/If the short trade is on (breaking the high is not out of the question), the target is back through the previous low. If it is on debt-contagion, the next item to watch for is the US Fed taking even further unprecedented action that backstops debt-contagion and broad liabilities of the financial system. After that, the hyperinflation scenario would play out.
A chart worth considering for timing of the short trade is the comparison between bear-market rallies. Surely this bear-market rally should be considered to be capable of breaking the all-time record given the outrageous circumstances.
Gold weakness could potentially improve the positioning of the trade from the S&P 500 / Gold perspective.
So we will also be keen to re-visit the trade when it trades back above 2.0.
As we had mentioned several times, it was a geo-political imperative to get oil back to $40 USD a barrel.
Brent is $42.30 and WTI Crude $39.55. The best of the oil long is likely in the past – although the massive strategic spend worldwide could also keep buyers in the market.
It has been a quiet week for Bitcoin trading sideways and with options volatility falling over the week. There are large and committed short-sellers in the market, apparently not receiving the emails about the Grayscale Bitcoin purchasing everybody else is getting.
The market is still below the long-term bearish trend-line but looks highly suppressed, now spending a month near highs.
Trading volume in Bitcoin the last week has been at its lowest level since early March and the question of liquidity will arise for bearish positions being capable of exiting their position.
It is easy to imagine a scenario where they cannot – it could decimate the asset after bullish actors were destroyed in the price collapse in March.
Looking at the price action yesterday, it looked like long-term buying algo’s on the bid, buying as much as they could without trying to influence the price. Busy short term trading bots on the offer were getting very little purchase with a very quiet market, and 0.000% funding rates on Deribit.
The biggest risk to Bitcoin at this stage might be the chance of a risk-off trade in traditional markets where the previous correlated move comes back to haunt Bitcoin.
Bitcoin in US Dollars on the Daily
With Bitcoin at recent highs for the last month, we can see how volume has collapsed over that time.
Bitcoin volatility has plateaued low, with little interest the last 24 hours.
The Fear & Greed index has slowly appreciated the last week, plateauing at a slightly positive neutral. Plenty of room to move into greed. We would have to assume that a truly bearish move would take the market by surprise.
With a framing between 50% and 72%, the chart below shows Bitcoins dominance in the digital asset space. We have seen trendlines work on the chart before and Bitcoin is currently barely above the up-trend shown in the chart.
After a huge move lower in the dollar index, there is some bounce-back on Friday.
We wonder if the money trade (sell US Dollars, Buy Gold, Bitcoin, TIPS) will take a back-seat as hysterical exuberance re-enters markets in its blow-off phase. It is easy to imagine a month of quiet markets on this front.
Gold has broken back below its important 1700 level and could be weak or do very little over the next month, if markets do enter a twilight zone phase. The Gold price move supports the idea that this trade is over for now.
US Dollar Index (DXY)
The Dollar Index finished its organised trend lower (blue), may have attempted a reversal before capitulating (red) but the recovery looks good for a reversal of the trend (green).
This supports the idea that the money trade is over for now.
Treasury Inflation Protected Securities (TIPS)
Our TIPS priced in the Dollar Index (to remove the effect of a falling dollar) shows the trade may also have peaked for now.