1/ How long can this bear market last and how low BTC can go?
Before anything else, I would like to say that no one can exactly predict in days how long a bear or bull market could last or how low and high the prices can go, but we can try to make predictions using past events
and drawing some projections about the future, this is my intention with the present article/thread.
1 — How long can a bear market last?
Some will say that we’re just entering a bear market, no, we may be entering now into a recession mode market, but usually, bear markets
are measured from the previous ATH or the first lower low, so I would say that we are in a bear market for something around 200 days now.
4/ 1.1 — How long for a proper bull market with good macroeconomics, and chances of a new ATH?
This one is the one that I believe could take more time to happen because it’s extremely correlated to the macro scenario and the big investors should be in risk-on mode, this is
5/ usually triggered by Central Bank with their monetary policies and incentives.
First, let’s understand what can lead Central Banks to change their policies, the FED, as the nation’s monetary policy authority, influences the availability and cost of money and credit to
6/ “promote a healthy economy” (they believe). The US Congress has given the FED two coequal goals for monetary policy: first, maximum employment; and, second, stable prices, meaning low, stable inflation. This “dual mandate” implies a third, lesser-known goal of
7/ moderate long-term interest rates.
8/ This moderate long-term interest rate is what they consider a neutral rate — a level that neither stimulates nor constricts economic growth. Fed policymakers estimate that the neutral rate is roughly between 2% and 3%. But this is not an exact science, changes in the macro
9/ situation can make FED take action to elevate the employment levels or reduce the inflation, which could unbalance the scale.
Now let’s see some examples of these correlations in previous times, in 2020 when COVID hit, with the lockdown policy, the unemployment rate started
to increase, and as we saw earlier one of the main goals of the FED is to maintain high employment rates.
11/ With unemployment growing on a monthly basis, and risks of a recession forced by lockdowns, markets also started to melt, in the period of 18th February to 20 of March, S&P500 fell almost 35%, NASDAQ100 fell almost 30%, and BTC close to 60%. Trying to reduce unemployment and
12/ save the US economy FED launched a program that cuts rates to 0% and launched a 700 billion quantitative easing program, after these incentives all markets peaked, and BTC gonne from 3.500 to 65.000 in a little more than one year (1).
13/ After BTC peaked at around 65.000 (2), markets started to notice that inflation was growing, so there were some expectations toward the FED meeting (27–28 of April 2021), at the meeting, everything remained the same, but there were some talks through FED policymakers raise
14/ interest and start to slow down the QE, that was enough for big investors activate the risk-off mode.
15/ In the June-July 2021 “bear market lateralization-consolidation” (3) FED announced that is likely on hold relative to interest rates at least until late-2022 (haha), investors have been looking for clues as to when the monthly bond purchases might start to be pulled back,
16/ after the minutes were released showing plans to pull back the pace of their monthly bond purchases likely only before the end of the year, the investors changed their mindset to risk-on mode again, for the last ride.
Now, let’s analyze the chart of the fall.
17/ On November 3rd (1) 2021, after the FED post-meeting press conference, Federal Reserve Chair Jerome Powell indicated that the FOMC “will start to reduce the pace of asset purchases,” in a process called tapering (remember that market run again because FED delayed this
18/ decision earlier?). At the time Fed has been purchasing 80 billion in U.S. Treasury securities and 40 billion in U.S. agency securities each month. Powell stated that starting in December 2021, the monthly asset purchases initially will be reduced by 10 billion for
19/ Treasury securities and 5 billion for agency securities, there was other news that drove the market downwards like Evergrande and China banning centralized exchanges, but these facts just served as a trigger to big investors de-risk their positions faster.
20/ On November 25th (2) started rumors that “The U.S. Federal Reserve will likely double the pace of tapering its monthly bond purchases from January to 30 billion and wind down its pandemic-era bond-buying scheme by mid-March, Goldman Sachs strategists said in a daily note
21/ on Thursday.” Markets understood: risk-off hard.
Note that the first part of 2022 was a sideways move, until March, on the end of March we started to rally up, but after the FED minutes (from March 15–16 meeting) were released (3), BTC dropped again with the official
22/ announcement that “a maximum of 60 billion in Treasuries and 35 billion in mortgage-backed securities would be allowed to roll off, phased in over three months and likely starting in May. That total would be about double the rate of the last effort, from 2017–19, and
23/ represent part of a historic switch from ultra-easy monetary policy.”. Also, at the March 15–16 meeting, the Fed approved its first interest rate increase in more than three years. The 25 basis point rise — a quarter percentage point — lifted the benchmark short-term
24/ borrowing rate from the near-zero level where it had been since March 2020. The minutes, though, pointed to potential rate hikes of 50 basis points at upcoming meetings, investors read, risk-off.
25/ As previously mentioned before, one of the main goals of the FED is to maintain the employment rate high and the inflation low, if you revisit the unemployment chart, you will notice that it remains low, otherwise the inflation has not peaked yet, and the last CPI data
26/ shows a y/y of 8.6% (4) — higher than the previous readings 8.3% April and 8.5% March — , deep is a bad signal for investors, and many would prefer to avoid risks because as inflation is high and unemployment low there’s enough room for FED rate even more rates, which will
27/ take liquidity out the volatile markets and depending on how hard tight they push this line, could throw markets in a deep recession.
28/ If you chart BTC or any other volatile asset trought history you will notice this pattern of Central Banks creating/withdrawing economic incentives will make those markets have insane bull markets or bear markets. Another example in time is the BTC end of the
29/ bull market chart below.
30/ The previous last time that Federal Reserve started a Quantitative Tightening was in December of 2017, coincidently or not, December of 2017 was the time that formed the BTC ATH of that bull cycle (1). Coincidently or not — again — , in December of 2018, BTC found the
31/ bottom, and was when the Federal Reserve lowered its rate hike projections and warned about the possibility of they stop doing Quantitative Tightening (2). And the FED abandoned rate hikes in January and in March 2019 (3), was the time when the Federal Reserve announced
that they will be stopping their Quantitative Tightening all at once, after that, a rally started on BTC.
CONCLUSION: It’s really hard to predict when the market will have a proper run, but you don’t need to know exactly, you can follow the path of monetary
33/ stimulus/contraction. Monetary stimulus can lead the volatile assets to blow off top in a short time frame when compared with situations without stimulus, monetary contractions can lead assets to bottoms at the same pace. When monetary contractions end you can expect a
34/ recovery from markets, even expect a run, but without stimulus will take a longer time frame to break the previous ATHs.
Ps.: I know there’s more data underlying how long/short the moves can last on bull/bear markets in situations of market stimulus/contractions, the main
35/ point here is how these situations can change investors’ minds to risk-on/risk-off.
36/ 1.2 — The correlation between inflation peaks and Stocks performance.
An analysis from The Leuthold Group looked at market performance since 1945 and found that when inflation is high, stocks tend to perform well right after the inflation rate peaks. Also, @GameofTrades_
37/ shared a chart that shows that S&P500 has bottomed right before peak inflation in nearly 20 different high inflation rate episodes going back to the 1950s.
38/ Accordingly to Paulsen’s analysis of the data when inflation is at lower levels, between 2% and 4%, changes to the inflation rate don’t have too much of an impact on stocks, but the market becomes much more sensitive to inflation once the annual inflation rate jumps above 4%,
“even if inflation stays high for a while if it just stops accelerating that’s typically been a really good thing for stocks,” Paulsen says.
When the rate is 8% or above, the measure Paulsen used to assess the S&P 500 performance showed stocks do well for the next year when
inflation began to decelerate. But it showed poor stock performance when inflation continued to climb.
41/ Why? As previously seen when inflation is high, the FED tends to adopt a contractionary monetary policy, as the hike in short-term interest rates, because higher interest rates make it harder for businesses and consumers to borrow and spend money, which can help slow demand
and battle rising prices. But it can also crimp prices for financial assets, like stocks and cryptocurrency — and that can make investors fearful. We’ve seen ample investor concern as the FED hikes interest rates.
When inflation is really low, investors tend to worry about a weakening economy and what that means for companies’ earnings and stock prices. As the inflation rates accelerate, stocks can do better, but then it doesn’t take long before rising inflation becomes negative for
the stock market, Paulsen says.
That’s part of the reason the inflation rate’s peak is so important to investors, he adds. When inflation rises, investors are more pessimistic and want to keep their money on the sidelines. Stock prices fall on these concerns, and when
45/ inflation moderates you have a buying opportunity. The influx of cash buoys stock prices back up.
46/ This thesis can be confirmed by a recent survey by Bank of America Corporation fund managers showing that investors are piling into cash as the outlook for global growth plunges to an all-time low and the fear of stagflation (recession + inflation) grows. The cash levels
47/ among investors hit the highest level since September 2001, the report showed, with Bank of America describing the results as “extremely bearish.”
48/ The question that remains is whether inflation already peaked or will peak anytime soon? It’s also very hard to predict the answer to this question because the answer will be based on monthly economic data, and in one-month inflation can go lower, and in the next one peak
49/ again, so it’s important to follow CPI data, PPI data, and if you live in the US take attention to the prices because as shown in one chart shared by @GameofTrades_,">@GameofTrades_ inflation tends to fall faster than it rises.
50/ 2 —How low BTC can go in a bear market — 200wMA is where Bitcoin always found support.
In the previous bear markets the 200-week Moving Average always worked as strong support for BTC, and only was crossed down briefly two times, in the 2015 and 2020 COVID crash, everyone is
now questioning if it will hold again or if it will be the first time that BTC breaks the trend for an extended period. Also, it's important to notice that since 2013 BTC price never crossed down the previous ATH, the previous ATH for BTC is close to the 20.000 region.
52/ The S&P500 chart follows the same pattern, always being supported by the 200wMA, only crossing down in the last decade at the COVID crash, but there's one moment in time when S&P500 traded for something around 861 days below the trend line, IN THE 2008 RECESSION, the BTC
53/ chart never faced a recession, now with growth of the risks of a recession in the US, plus the strong correlation between BTC and TradiFi, and several uncertainties about the macro situation, a SCENARIO TO BE CONSIDERED is that
54/ if S&P500 faces a recession chart "trading below the 200wMA", probably BTC will follow the same pattern.
55/ How deep can S&P500 fall into the recession chart? This is also a question that cannot have an accurate/perfect answer (unless you can time travel) because no one can predict how much the US government will allow stocks to nuke without intervention, the 200wMA for the S&P500
56/ chart is now trading around 3.500 points, which represents a 6.5% fall from the current level (considering the current price of BTC 22.500 a 6.5% fall would represent a drop to close 21.037), another key level that I would take in consideration would be the 3.000 points,
57/ from the current levels would need a drop of almost 20% (the same scenario for BTC would put BTC trading at 18.000), and IMO the last target and most chaotic one is the 2.200 points range — the COVID crash bottom — , this would represent a drop of 40% (the same scenario for
BTC would put BTC trading at 13.500). In my personal opinion, I don't believe that the US will allow stocks to reach as low as 2.200 points without intervention, further we will discuss some situations that could trigger an intervention by the US government.
59/ You can argue that BTC should be compared with tech stocks, so NASDAQ100 would be more accurate, OK, I got you covered. The 200wMA supported the NASDAQ chart even in the COVID crash but was also crossed two times down, the first in the dotcom bubble (a rapid rise in U.S.
60/ technology stock equity valuations fueled by investments in Internet-based companies in the late 1990s, just consider that we can be living the cryptocurrency bubble — few projects with real use cases, some crumbling and losing investors money, and extremely high valuations
fueled by investors who are throwing money randomly at every project that appears), and the second one was the 2008 recession. Making the same comparison made with S&P500 and BTC would result in the following prices: a drop of 4% to reach MA, would represent a price for BTC
of 21.600, and a drop of 13% until the 9.800 points region, would represent a price of 19.575 for BTC, and a drop of 40%, which would put NASDAQ at the same levels of the covid crash at 6.700 points, the same structure would represent a price of 13.500 for BTC.
63/ Just consider that if this scenario plays, BTC could reach prices even lower than the one mentioned in each level, because BTC always dipped more when compared with TradiFi trought history.
64/ 3 — CONCLUSION
Historically, fortune favored the ones who bought in thought moments, in moments of uncertainty, when prices traded close to the 200wMA, I’m not saying that BTC will not cross down or reach lower than 13.500 (max pain that I drawn), but if you start to DCA
65/ closer to the 200wMA and keep the DCA when BTC remains closer or below, probably you will have one of the best positions possible.
66/This is not financial advice, but only a study from previous events and for future forecast projection for educational purposes.
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Take care and always DYOR.This post is based on this twitter thread.