Check out the blog link for charts: https://macrotourism.substack.com/p/a-bear-market-rally?sd=pf

Last week, the Fed hinted at slowing the pace of interest rate hikes from 75bps to 50bps per session. The markets reacted positively, ending the week almost 17% higher than the cycle lows. The follow through this week was tepid.

Was last week’s announcement “the pivot” we’ve been waiting for? Is it time to go “risk on” again?

A Bear Market Rally

History would lead us to believe that last week’s price action was nothing more than the top of the 3rd bear market rally since the markets peaked in November 2021. If that is the case, then we should expect more downside price action, possibly setting new lows for the S&P at 3200 or below.

Timing of bear market bottoms - Typical bear markets bottom 70% of the way into a recession. In our case, the recession has not yet even begun. Next year we expected to experience the lagging impact of this year’s financial tightening cycle. The alternative view would be that the recession is over, or that we will avoid one completely with a “soft landing.” If that is true, then the market may have bottomed.

Timing of a new bull market - In order to restore positive momentum in risk markets, we need the financial tightening cycle to not just slow down, but reverse. Given that the yield market is deeply inverted (short dated bonds have higher yield then long dated bonds), this is a question of “when not if.” Let’s wait to see the Fed actually take action. As they say, “Don’t fight the Fed.”

Was That a Pivot?

To some analysts, the Fed’s recent policy change can be viewed as a pivot. The alternative view is that we are still in a tightening cycle, and a true pivot needs to change course, not simply slow down tightening.

Currently the Fed is reducing the size of its balance sheet by $95B per month, and raising interest rates by 50-75bps per session. Clearly financial conditions are still getting tighter each month.

In order for the Fed to fully pivot, they need to see inflation come down to a level they are comfortable with. Their stated target CPI number is 2%. Inflation has likely peaked for the cycle at 9.1% in June, and is now decelerating each month, but we are still far away from 2%. So the question is “How how far will inflation need to come before the Fed feels comfortable, and how fast do we get there?” While some components of inflation are rapidly falling (commodities, goods), others are more “sticky” and will simply take time and space to fall (services, rent). The prudent view here may be to wait and react to the data, rather than try to front run the Fed.

What does this mean for my crypto bag?

While several fundamentals point to bitcoin price potentially forming a bottom in the $15-16k range, there are several things to keep in ind:

These same models have proven to be wrong multiple times in the current cycle (e.g. S2F, multiple $100k predictions, etc). There is good reason to believe that “this time is different”, as current financial conditions are truly unique in the context of bitcoin’s history. Macro is driving the bus here.

While a bottom may be in, a bull market could still be months or quarters away. It could be wise to maintain a cautious outlook until the macro backdrop clears up. Once financial conditions loosen, the path will illuminate for bitcoin to regain bullish momentum.