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Market Lab Report - Black swans; DXY direction; Short interest bullish for BTC; Major avg internals poor; Inflation sticky

Market Lab Report

by Dr. Chris Kacher

The Metaversal Evolution Will Not Be Centralized™

US-China relations a black swan?

Another black swan could spring from the political tensions between the US and China. They are at a tipping point which could lead to serious trade consequences or even war.

  • Discussions between the two sides have become exchanges of accusations that worsen relations, so it is worse to have the discussions than to avoid them.
  • The US political decision-making system is fragmented, and the Biden administration is not in control of dealing with China.
  • The political timetable of the election cycle between now and the 2024 elections in the United States and Taiwan will likely lead to more push-the-limit anti-Chinese brinksmanship from the US.
  • Some red lines include the US or Taiwan coming out in favor of Taiwanese independence, Chinese military planes and ships testing previously established red lines, China's dealings with Russia, economic sanctions, and controlling essential technologies and minerals.
  • These conflicts are likely to intensify over the next 18 months.
  • The US-China trade could collapse, severely hurting supply chains and trade, and potentially leading to military war.

DXY Direction

The DXY showed renewed strength this week, breaking over the 102 level. This should continue to pressure stocks and Bitcoin. But while DXY could hit anywhere from 104 to 107 considering it crossed over the 102 level since mid-March, this month-long structure will eventually break because the US Fed hopes to stop their rate hikes while the EU plans to hike at least twice more. The euro makes up 58% of the DXY basket so has the most inverse influence on the direction DXY. When the euro rises, DXY is likely to fall. This is bullish for stocks and Bitcoin.

Short interest bullish for Bitcoin

When the Bitcoin market gets overcrowded with short positions, this can lead to squeezes and strong bounces. The question is whether the most recent red arrow shown on the chart for short positions will repeat prior spikes in short interest since the prior red arrow in March was due to the Fed injecting liquidity to backstop depositors due to the Silicon Valley Bank disaster. That said, we are still likely in a dead bat bounce in both stocks and crypto due to the macro environment, sticky inflation, and potential recession so markets remain vulnerable. 

Major averages internals

Major averages remain weak under the hood. The NYSE Composite is considered a broad market index, reflecting the performance of the overall stock market rather than just specific sectors or industries. It has been lagging and is no better off since last November.

Only the NASDAQ indexes are showing strength, giving the illusion of strength but the reality is that NASDAQ breadth is lagging badly. Only a handful of big-stock tech names which carry the majority of the weighting are pushing the NASDAQ indexes higher. The hype over anything AI is making the FAAMG stocks and semiconductors such as AMD and NVDA rally, but any early profits derived from AI are a grain of sand as these companies are massive companies with market caps often exceeding $1 trillion. We saw a similar occurrence in the dot-com days of the late 1990s where there was much overpromising and underdelivering. While AI is transformational tech, so was the internet, but the present hype exceeds the reality.

Inflation is still prevalent

As for the macro environment, imagine having your life savings inflated away, unable to afford food for your family. While this has happened a number of times in financially unstable countries such as Venezuela and Argentina, Americans are experiencing at least 20-30% food inflation and in some cases, prices for the cost of basics such as apples have more than doubled. We know the CPI is manipulated heavily. Millions will be tossed aside.

It is important to note that the CPI, PPI, and PCE all represent a slowdown in inflation rather than a decline. For example, eggs in the US dropped by 1.5% but are still rising annually by 21.4%. So while CME Fed Futures predict the Fed is done hiking rates with three 25 basis point cuts by the end of the year, more hikes may be coming depending on the data. The Fed's mandate of bringing inflation to under 2% suggests further hikes down the road. A number of Fed members such as Raphael Bostic recently said they see rates being hiked again later this year and not being reduced until 2024.

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