Market Overview Feb 7 2023
This is a macro analysis of the market. A shift in market conditions can be expected, here is why…
January was a great month for the markets in general, equities and crypto rallied, the Fed announced that inflation was lower than the expected and some companies showed positive earning during Q4 of 2022.
I still think that market conditons may flip soon due to the overall macro envorionment. There is high and entrenched labour inflation causing inflationary pressures. This results in higher prices and wages, making it more difficult to reach the 2% inflation target.
Although inflation has been coming down, there is this idea that the Fed will achieve a “soft landing” and reach the target 2% inflation. However, I am not a huge believer of this narrative. The data that we have now does not suggest that a soft landing is possible.
There has been an aggressive response of the markets after CPI and inflation data release. Equities and risk on markets such as crypto rallied in throughout January. I think in the next weeks we will revisit lower prices, there will be decent a correction coming.
From a trading perspective, it is better to trade level to level rather than have a bullish / bearish approach. These are very choppy market conditions, it is better to stick to levels.
Long term investment wise, I am not looking to buy anything for long term cyclical hold given that I favour a recession to kick in. I dont see a “soft landing” happening.
Market outlook:
- Yield curve repriced with higher rates for a longer period
If we see inflationary pressures in the market, it is important to take a look at the yield curve. When the yield curve is repriced higher there is a good chance dollar starts trading higher as well.
- The Fed has limited room for interest rate cuts in 2023.
There is a market expectation that the Fed will stop hiking intrest rates by Q2 of 2023 but if inflation remains sticky, I doubt that they will stop. Right now intrest rates are sitting at 4.75% and we can expect it to go around 5.1–5.5% during the course of 2023.
- Expect the dollar to strengthen
- Decrease expected in equities and cryptocurrencies
Long term investment wise: I am not looking to buy anything for long term cyclical hold given that I favour a recession to kick in. I dont see a “soft landing”. My investment portafolio is all cash right now.
Coming up in terms of the Fed… We have inflation data and CPI release on the 14th of February. So, Happy Valentines! Get ready to get f*cked.
EQUITIES:
S&P 500
So far the S&P 500 has seen a strong rejection of the 4180 level on a monthy time frame. Unless there is acceptance of this level, I would expect it to come back down into the trading range. Perhaps retracing into the mid level at 3880.
NASDAQ
Similar to the S&P 500, NASDAQ is also rejecting the top of the range level at 12870. If there is rejection at this level, I would expect the price to trade back into the mid level at 12058.
BONDS
The US bond market yield curve is still inverted. The 1 year bond yield is pricing at 4.9%, which tells us that the expectation is that rates will continue to go higher around the 5% mark.
In contrast, the 5 year bond yield is at 3.8%. I believe that this might be catching up to the 4% lows.
In addition, higher time frame bonds such as the 10s and 20s take longer to catch up but seem like they will be trading higher as well.
US Dollar (DXY)
The US Dollar is strengthening. I could see it trading to 105 level. It touched a mayor support level at 101.3 and bounced back into the trading range.
BITCOIN
On a monthly time frame, Bitcoin still has a bearish market structure. On a monthly chart we haven’t printed a higher high and it is still respecting the bearish market structure. The momentum to the upside is starting to look a bit weak. It hasn’t event reclaimed the February open level yet.
If we zoom in into a shorter time frame, we can see that we have not had any candles closing above 24.4k. Price wicks and there is a sell off, wicks and sell off. This indicates that sellers are stepping into the market at this price level. In addition, price has found a level of support around the mid level between 20.8k and 19.9k (which happens to be 2017’s market top)
I think it is a good time to look for short entries. There is a good chance that price comes back down into the mid level around 20.8k-19.9k.
Afterwards I think two scenarios can come into play…
Scenario 1:
If price keeps rejecting the 23.7k-24.4k level it could retrace back to 20.8k-19.4k. If price rejects this support level it could bounce back and retest the 24.4k-25k level, claim it and bounce back down to the monthly lows and enter an accumulation phase.
Scenario 2:
If we start breaking down and conditions remain bad. Inflation stays and the Fed has to keep hiking rates and credit becomes tighter this will cause risk on assets to become less attractive investments and the cryptomarket to contract.
If we break down form that level of 19.5k it opens a gate to trade the next range (19.5k to 15.9k) and if that breaks down, we will be trading new lows. The new trading range will be between 16.5k as the top of the range and the 2017 mid level at 11.8k, as the bottom of the range.
No one can know 100% what will happen, but these are the two scenarios that I could see playing out depending on market conditons, momentum, the Fed’s actions, etc. Or perhaps a combination of the two. Lets see what happens and what we get over the next weeks…
Love & light,
Mariana
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