Weekly Investor Report: Issue #2

In these weekly Investor Reports, I unpack what I think is going on in the macro, crypto, and traditional markets. And if I’m seeing any potential opportunities, I’ll highlight those here. As always, nothing you read here is financial advice. It’s just my opinion on the markets.

US inflation keeps coming down.

US inflation (CPI) came out on Wednesday, May 10, and it was good news. Yearly CPI dipped to 4.9%, getting below 5% for the first time since May 2021. Keep in mind, that means yearly inflation is still going up – just not as fast. 

Still, investors are seeing it as a good sign. With Wednesday’s numbers, there isn’t as much reason for Fed Chair Jerome Powell to raise interest rates in June. And given the US banking crises, I think he’d be wise not to. As I metioned in last week’s report, banks can’t handle higher interest rates right now. That’s because higher rates mean bonds prices go down, and banks hold a lot of bonds as assets. If the value of those assets gets too low, banks won’t have enough funds to pay all their customers in the event of a bank run. Correction: many of them don’t already.

And yes, the FDIC (Federal Deposit Insurance Corporation) insures bank deposits of up to $250,000. But that’s a drop in the ocean for the bigger bank accounts of businesses and high-net-worth whales. Powell knows this, and so does the market: 78.8% of investors now expect a pause in rate hikes in June (chart below). If they’re right, it would be the first time since March last year that the Fed did not raise rates at a Fed meeting. And if that happens, you could see stocks and crypto rally on the news.

China is approaching deflation.

China’s yearly CPI number came out on Thursday, May 11, at a mere 0.1%. In other words, prices in China are only a tiny fraction higher than they were a year ago. They’re almost in the deflation zone (below 0%). 

Here’s where it gets more interesting. China’s yearly PPI (Producers Price Index) read negative 3.6% for April. This means that manufacturers charged 3.6% less for their goods and production materials than this time last year. This isn’t surprising given that China has significantly eased Covid restrictions, making its supply chains cheaper and easier to manage. As a result, manufacturers haven’t had to hike their prices as much to turn a profit. 

Now, China is the second biggest economy in the world and its biggest exporter. So, it’s safe to say that China’s deflating PPI numbers could pull inflation even lower in the US and other countries that heavily import from China. 

Here’s a chart showing the latest inflation readings for the US, UK, EU, China, and Japan. As you can see, inflation is still trending down. 

Also, consider that AI is going to make it a lot cheaper for businesses to produce things going forward. That could be extremely deflationary.

Bullish divergence on the US dollar index (DXY).

The DXY tracks the dollar’s value against a basket of major currencies. It peaked at around 113 in October last year: at about the same time stocks bottomed, and about a month before bitcoin bottomed. You’ll notice in the next chart that the DXY is still in a downtrend on the weekly time frame (making lower lows and lower highs). But even though the index made a lower low earlier this month (white line), the relative strength index (RSI, blue line) made a higher low.

Here, the RSI takes the DXY’s average gain of “up weeks” and divides it by the average loss of “down weeks” (over the past 14 weeks). And when those average gains start to outmuscle the average losses, it shows buyers are getting stronger relative to sellers. In other words, we might see the dollar rally more in the coming weeks. 

Of course, a rising DXY can signal that investors are buying the greenback for safety. But it doesn’t always mean stocks and crypto have to go down. Still, it is something to keep on your radar for now. 

Bitcoin bear trap in the making?

Bitcoin rallied a few percent on Wednesday’s CPI news – but that rally never lasted. The price then dipped below $26,000 on Friday – but that dip never lasted, either. As I write this, bitcoin is trading back above $27,000 a coin. 

Technically, it’s now in a downtrend on the daily chart for the first time this year (with lower highs and lower lows). While that’s not ideal for the bulls, bitcoin is so far bouncing nicely off the bottom Bollinger band. In the past, that’s been an early warning sign of a bitcoin bear trap – where the bears get trapped selling the lows and the price rips higher instead.

For now, bitcoin is still in a trading range between ~$27,000 and $29,500. If it can reclaim the blue 50-day moving average (MA), you’ll probably see it retest the range highs at $29,500 (green line). And if it can close a day above that, I think the bear trap scenario (similar to the one in March) would be properly confirmed.

See, a lot of short sellers will have set their stop losses above bitcoin’s last high (green line). So if the price can get above it, you could see a big short squeeze. I.e. the shorters will become forced buyers to close out their positions. It would also mean bitcoin would no longer be in a downtrend. Not to mention, it would invalidate the bearish bitcoin head and shoulders pattern I wrote about last week. 

On the flip side, a daily close below where bitcoin closed on Saturday at around $26,700 (orange line) would give the bears more control. I’d say a retest of Friday’s $25,800 intra-day low low (red line) becomes likely in that case. And if it closes below that, you’ll probably see the price accelerate down near the 200-day MA. 

Ether and some altcoins are starting to show strength.

Bitcoin has run ahead of most altcoins so far this year. But I noticed during Friday’s bitcoin drop that altcoins like ether, Solana, Ada, Avax, and Link all finished the day higher. About a month ago, I wrote how bitcoin dominance was losing steam, suggesting that altcoins could gradually start to outperform bitcoin. 

Since then bitcoin dominance hasn’t moved much, but it’s worth noting that the range is getting tighter. If bitcoin dominance can trade below last week’s low at around 47.5% (green) and bitcoin goes sideways (or up) in dollars, you could see altcoins finally have their moment in the sun. But above 48.5% on a daily close, and you might have to wait a while. 

In last week’s report I wrote how ether could outperform bitcoin in May based on a W-bottom pattern forming with Bollinger band confirmation. So far, that thesis is still playing out, with ether outperforming bitcoin by about 1.5% last week. If that continues, it would be another checkmark for altcoins. 

Stocks aren’t doing much.

Not much has changed for stocks since last week’s report. The S&P 500 finished slightly down (~-0.35%), while the tech-heavy Nasdaq finished slightly up (~+0.7%). That makes sense as tech stocks are usually more sensitive to better economic news – like last week’s 4.9% CPI reading.

The S&P 500 is slowly grinding higher. I’m still bullish on the index, so long as it closes this week above 4050 points. In that case, it would be back below the 21-week exponential moving average yellow), and below the lows of the past three weeks. 

But even if the index gets below that 4050 level, there’s more support at the 50-day simple moving average (blue line) and then the 0.236 Fib (~3,800). As has been the case since October last year, dips are for buying.

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