Market Lab Report / Dr. K's Crypto-Corner
by Dr. Chris Kacher
The Metaversal Evolution Will Not Be Centralized™
Global unrest accelerates. Putin announced military mobilization and threatened the use of nuclear weapons. Meanwhile, Europe is facing severe fuel shortages as Russia cuts off natural gas. Then we had the terrorist-induced gas leak of a major supplier. European leaders are worried about social unrest as winter approaches. Of course, this triggers rampant inflation in the EU along with the euro having broken parity with the dollar while both the euro and pound hit all-time lows against the dollar. The CME had to halt GBP options trading as the pound collapsed earlier this week. Inflation in the EU hit a record high of 9.1% driven by sharply higher energy and food prices, and is likely to head into double digits. This was the highest rate since the euro was created in 1999.
If the Russia-Ukraine conflict drags on through the winter, this could spark a revolution in the EU as many families will be unable to heat their homes.
Sentiment Crumbles
Sentiment is at negative extremes. As we have said, oversold markets are ripe to dead bat bounce, but while this suggests lower lows for stock and crypto markets, dont let the dead bat tag fool you. Such bounces can be sharp as short covering takes hold. This applies to both stock and crypto markets.
We have seen such sharp rallies during two of the worst bear markets: the bursting of the dot-com bubble from 2000-2002 and the post October 1929 crash from 1930-1932.
When to run for cover?
The question becomes when to cover your shorts. Pigs gets slaughtered. Greed wrecks profits. When you have solid profits in a hurry on the short side, it is often time to cover. Then keep a close eye as bounce volume starts to ebb and curl over. Logical points of resistance in major averages and key stocks make for sound short entry points. The 40-wk MA often serves as a major point of resistance. The NASDAQ Composite has rallied up close to its 40-wk twice so far this year. Both were excellent places to initiate short positions in the major averages.
Supply-side Inflation
Hiking rates curbs demand such as we are seeing with real estate and oil but the primary cause of inflation is on the supply side. Supply-side inflation is soaring due to political uncertainties and crippled supply chains. Western sanctions on Russia are disrupting global supply chains. Many businesses that caught bankruptcies from COVID never reopened further reducing supply.
Central bankers believe hiking rates will always control inflation. But the fundamental problem is a damaged supply side hit first from COVID then from the ongoing Russia-Ukraine conflict. Hiking rates is disastrous when it is clear recession is here despite low unemployment which is always low just before major recessions. No wonder central bankers appear clueless.
With CME Fed Futures expecting 400-425 bps by year end, though this range was 425-450 just earlier this week, expect lower lows after lower highs induced by any short covering rallies in both the major stock market averages and cryptocurrencies.