Weekly Investor Report: The US debt clock is ticking
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.
The US debt clock is ticking
Last week there wasn’t any new interest rate or inflation news for the US economy. So, traders and investors have turned to the US “debt ceiling” debate as the next big potential market event.
Simply put, the debt ceiling is like the credit limit on America’s credit card. The US government borrows money to cover expenses that tax revenues can’t fully pay for – things like social security, Medicare, the military, and other government services. This borrowed money mostly comes from selling securities like government bonds to various lenders, including individuals, corporations, and foreign governments. But there’s a limit to how much the government can borrow, and that’s the debt ceiling.
Right now the US government are on the hook for just under $31.5 trillion in national debt, which is just above the current debt ceiling of $31.4 trillion. And with interest payments on its bonds due on June 1st, there’s a chance it won’t have enough cash on hand to pay its lenders. In other words, the US could “default” on its debt: something that would likely shock the economy and send most markets into freefall. Unless, of course, Uncle Sam can find a way to borrow more money. And to do that, the debt ceiling must be raised.
Will the US raise the debt ceiling?
Historically, Congress raises the debt ceiling as needed. Since 1960, they’ve done it 78 times. But this time, The Biden administration and the Republicans are in a bit of a standoff. While both the Democrats and the Republicans understand the importance of raising the debt ceiling, they’re still bickering over the terms. The Republicans want to make spending cuts to help them foot the bill. The Democrats, meanwhile, would rather not have any strings attached to raising the ceiling.
Still, if those negotiations don’t resolve themselves, there is another way: the 14th Amendment could be used to raise the debt ceiling. This amendment says that the validity of the US public debt shouldn’t be questioned. If this were invoked, it could bypass the need for Congress’ approval. But this is uncharted territory – it’s never been done before and would likely face legal challenges.
So what’s going to happen? Regardless of how the debt ceiling gets raised, history suggests it will get raised. The thought of the world’s biggest economy defaulting on its debt would just be too much to handle. So my guess is they’ll kick the can down the road again, like they always do.
Bitcoin is boring now. But it won’t be for long.
The debt ceiling issue highlights an important fundamental reason to hold bitcoin for the long run. Unlike fiat currencies, bitcoin isn’t created by governments with big debts. It’s just code and it has no debt.
As for bitcoin’s technicals, it started last week at about $26,900 a coin. It ended it $100 lower, which is basically nothing. It’s been one of the most boring weeks of bitcoin price action I’ve seen in ages. But if there’s one thing I’ve learned in crypto, it’s this: boring price action is usually followed by a big trending move. So, if you’re tempted to switch off from the charts because bitcoin ain’t moving, don’t be. A major bitcoin opportunity is likely brewing.
As for which way this move will go, that’s yet to be decided, but the levels are clearly defined on the charts. For the chart below, each red or green candle represents one week of price movement. As you can see, bitcoin is currently resting right on the key support we outlined last week at around $26,700.
The 100-week moving average (SMA, white line) is also acting as support in that region, along with the 21-week exponential moving average (EMA, yellow line). So naturally, losing those levels on a weekly closing basis would not be good – and a potential test somewhere near the 50-week SMA (blue line) comes into play. That said, I personally think it would be a great opportunity to buy more bitcoin if it gets there.
Still, those levels haven’t been broken yet. And last week’s indecision does show a slowing of the bearish sentiment from earlier this month. So there’s still a decent chance the move could come to the upside. Notice too how the 21-week EMA crossed above the 50 SMA back in March. That’s only happened four times since 2012. Three of those times resulted in big upside moves over the coming months for bitcoin, as you can see in the chart below.
Also notice how the yellow 21-week EMA has acted as strong price support in bitcoin bull markets. Bitcoin held the the 21-week EMA in March this year. So if it holds it again, that’s obviously very bullish. Last week’s high was around $27,700. A tick above that (or even better, a daily closure) would look very good for the bulls.
Ether has outperformed bitcoin for another week – but only by about 1%.
The chart below shows the price of the ether in bitcoin. As outlined in last week’s report and the week before, I was seeing the possibility of ether outperforming bitcoin in May. This was based on the “W bottom” pattern in the chart having the right kind of Bollinger Band reversal structure. The next potential resistance is at the 21-week EMA (yellow line). If it can clear that, I think a move to the top Bollinger Band could be next.
It’s make-or-break time for altcoins vs bitcoin.
Ether going on a run vs bitcoin would likely bode well for the altcoin market. For the most part, bitcoin has left most of them in the dust this year. The bitcoin dominance chart below is still pretty much where it was when I wrote last week’s report. As with bitcoin, the ranges are really tight. And when they break, expect prices to move fast.
The same levels as last week still apply. If bitcoin dominance closes this week below the spike low of two weeks ago (around 47.5%), I’d get a lot more bullish on altcoins vs bitcoin. A close above 48.5%, and bitcoin probably dominates for a few more weeks or even months.
US dollar index: bullish divergence from last week still in play.
Last week I wrote about bullish divergence for the US dollar index (DXY). The index made a lower low, while the relative strength index (RSI) made a higher low. Now, the DXY rallied last week by about 1% on the back of that bullish divergence. But just like the ETHBTC chart above, its next line of resistance is its 21-week EMA (yellow line). It never breached it in March this year, so a weekly close back above it would be significant.
As mentioned last week, a DXY rally can signal that investors are taking risk off the table. But it’s also true that bitcoin and stocks can still rally while the DXY is going up. So for now, it’s just something to keep on your radar.
Gold is pulling back, but longer-term it’s still bullish.
While there’s bullish divergence on the dollar, gold has the opposite: bearish divergence. It’s when the price makes higher highs, but the RSI makes lower highs. Essentially, it signals that the strength of buyer pressure is running out. A reasonable first target for bearish divergence would be the 21-week EMA (yellow), which is currently around $1,930 an ounce.
Longer-term I think gold still has a lot more upside given the macro. And I think the next time it tests its previous all-time high region (red rectangle) will probably be last: and then gold could be off to the races. So I’ll be stockpiling more of the yellow metal if I see a bigger pullback.
Stocks are still making new highs.
The S&P 500 (SPY) had a good week last week, closing above the 0.5 Fibonacci retracement from the top of the last bull run to last year’s October low.
The next Fibonacci retracement target is the 0.618 at around 4,320 points. Given the 21-week EMA is now starting to act as support and slope upwards, the uptrend is getting stronger. So, it’ll probably get to the 0.618 barring some major bad news. Just like last week, any short-term dips are for buying.
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