Macro Market Outlook Update
I’d like to share an investment/speculative thesis I’ve formed over the last few years that is likely to play out over the coming months resulting in huge upside in a very short amount of time if correct.
First let’s go over our current macro environment and the narratives that are currently circulating.
1. Rate hike expectations — the bond market yesterday was pricing in over 90% odds of a 50bps move in rates to the upside in March and six or seven rate hikes for 2022. I think there is a significant chance that we see a reversal in these narratives around fed tightening due to weakening economic data. Will the fed tighten into a slowing economy? I doubt it and this is supported by technical indicators (TD9 on daily/weekly timeframes, Bearish RSI divergences on daily and lower time frames, rising wedge in the US10y). So with high CPI print and a federal reserve that is going to surrender to inflation, you could see panic buying as people attempt to get out of the dollar. Elliot Wave International recently put out a DXY chart that is showing the end of a corrective move we’ve had since May ’21 when we bottomed around 90, and the beginning of a major wave 3 move to the downside. If you look at the DXY bearish divergences on the daily timeframe w/ respect to RSI you’ll notice that it looks identical to what happened in March 2020.
2. Goldman Sachs trader Rubner has been publishing data w/ respect to net flows for quite some time and has been quite accurate since I began following him in Feb. ’21. It is loooking like if we could get past first two weeks in Feb w/o significant downside, corporate buybacks would pick up along w/ substantial retail inflows. So despite bearish news, WWIII headlines, and rate hike fears we didn’t make new lows (bullish divergence) and looks like we have fundamental catalysts that may catch many who are short offsides. Illustrated in the image below shows the DIX, which is often referred to as dark pools. This chart shows that dark pool buying is the largest on record during this recent sell-off.
3. Bull/Bear sentiment Index at negative reading only seen 2% of the time leading to avg. returns around 20% over following 12 months
3. Put interest as a % of market cap near ATH’s which aligns w/ bearish sentiment. Retail options activity is on the bearish side. VIX still elevated, so if we decline from here that’ll result in additional buy pressure. Over 2.2TN in notional value of derivates expires today, February 18th in the options market. Dealers need to cover their short gamma index hedges so we could get squeeze dynamics over the coming weeks/months that leads to retail interest and a longer run. “Drilling down into these numbers, on average investors traded $195bn of single stock puts daily over the past month, nearly 43% of total volume, and the highest since April 2020.” Much larger numbers of index (e.g. SPX) puts were traded which, like described above, could result in short squeeze fuel as dealers cover short gamma hedges.
4. Liquidity on both sides of all markets is low on a historical scale so money entering or exiting has significant price multiplier effects. In other words, we can see large moves in both directions, but because of current market participant positioning, I feel there’s a strong likelihood of short squeeze/ bullish action before downside and deleveraging later.
Now that we’ve established our macro outlook across broader markets, I’d like to focus on an asset w/in the currency market; Litecoin. It is a relatively hated asset but is showing strong fundamental network adoption statistics. Many who are familiar with this space understand what maximalism is and there is this belief that networks converge to one standard but there is a misunderstanding about how this network scales. BTC is unlike any money ever created because it has a absolute fixed supply, but what people often miss is that it also has demand constraints. Since we have a limited blockspace to ensure democratization of access to this network, we eventually get competition for blockspace resulting in fee pressure. Now many will tell you that layering solves this problem, but layering simply aggregates transactions into a higher layer and in order to use the chain and have security, you need to settle. This is why I believe that substitution is likely in our current environment. I am predicting that we will see significant increase in demand because of the macro outlook listed above and this will result in increasing demand for substitutes.
Quick explanation of substitutes: A substitute is a good that can be used in place of another. As the price of a product rises, at some level people either move to substitutes or cease use altogether. While a substitute would be less desirable at the same price as the original product, its lower price offsets this preference. In this manner the presence of substitutes reduces demand for the original good. The substitute competes with the original just as does increased supply of the original. Given that a coin has fixed supply, it is commonly assumed that no supply side increase can reduce upward price pressure. Bitcoin integrates transfer fees which necessarily rise with use. This unique characteristic creates downward price pressure by reducing demand. This rising cost also makes substitues viablle.
This is the same type of dynamic we’ve seen happen with Eth when fees rose and led to massive runs in price in Solanam Cardano, and Binance Chain.
From on-chain statistics we can see that Litecoin demand increases significantly as transfer fees on BTC rise. If you pull up the ltc/btc chart on trading view you can notice a multi-year bullish RSI divergence on both the weekly and monthly timeframes. It is looking like a set up similar to doge/btc from early 2021.
Image above showing BTC transaction fees and image below shows ltc/btc price breakouts during those period of high fees.
We’ve established the logic behind why we expect a significant move in bitcoin, which will eventually lead to an even large move in litecoin due to fee pressure. Now, I want to focus your attention from a perely technical perspective to an asset that had a 100x increase in price last year. The dogecoin/bitcoin chart looks eerily similar to the litecoin/bitcoin chart.. The next two images depict the similarities between the doge/btc price breakout of early 2021 and the current set up for ltc/btc in 2022.
Notice the similarities in terms of the number of breakouts above the 200DMA and subsequent rejections, the Stochastic RSI divergence on the monthly, and eventually the vertical move to the upside.
Ok, so we’ve formed a bias as to why fundamentally ltc/btc should breakout, and we have a macro bias that rate hikes expectations will reverse hard here. I’d like to add some context and confluence to this iidea in that it’s very similar to the set up we saw at the end of 2018/beginning of 2019.
What’s interesting about the Bitcoin “Long-Term Holder Net Position Change”is that our current cycle since summer of ’21 is very similar to the 2018–2019 market cycle. If this is to continue following 2018–2019 we should soon sed a large rally. BTC increased over 400% from March — July 2017, so if we see a similar rally soon we’ll be in the 100k+ range in a short amount of time.
Last macro chart below shows we have more room to run in our bull market is the Eurodollar Futures chart. For those who don’t know eurodollars are dollar deposits held outside the US banking system, and eurodollar futures are a way for people to lock in interest rates today for money they need to borrow or lend in the future. It is how the market sets interest rates.
I labeled each time that we ran into a major market cycle top. Notice that periods of Eurodollar futures rolling over coincides with bull markets and periods in the change in the price to the upside results in a collapse in asset prices and a deflationary bust.
So to summarize, if we’re correct about the reversal in fed tightening narratives (which could result in panic buying as people attempt to get out of sure losses to inflation), a move lower in the dollar is likely, a broad market rally across all risk assets should occur soon. And then if we break down the btc supply/demand dynamics for blockspace we should see transfer rees rise and a massive ltc/btc breakout taking ltc to the thousands of dollars range.
Let me know what you guys think of this idea and where I could be wrong here. Criticism/feedback appreciated. If you’d like this thesis outlined in video form, I do go over it on my youtube channel.
My latest video can be found here: https://www.youtube.com/watch?v=k_yAFD_vYOs
If you have twitter you can find me here: https://twitter.com/WLitecoin