This week, Glenn Williams Jr. addresses one of the hottest cryptocurrency debates right now: how traders should think about bitcoin and ether when they potentially hit a “golden cross,” a popular technical analysis indicator.
Then Todd Groth, head of index research at CoinDesk Indices, goes into how tremendously bullish a wide range of assets has become and where the Federal Reserve fits in.
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Many in the crypto investing space are excited as Bitcoin (BTC) nears the heralded “golden cross.” For those unfamiliar with this price chart technique, a golden cross forms when a shorter-term moving average (often the 50-day) crosses a longer-term (often the 200-day).
It’s a fairly common indicator, widely used by technical analysts, and seen as an indication of a newly forming bull market. Being a technician myself, moving average crossovers are certainly something I watch out for. Why is it thought-provoking? It puts the current moment in a larger perspective and prompts you to ask, “What has changed in the near term to accelerate price action and do I expect it to stay that way?”
But how good is it as a forecasting tool? It’s one thing to identify a moving average crossover and say, “That’s bullish.” It’s quite another to see if it actually was.
When I examine Bitcoin’s history, what strikes me most is how infrequently a gold cross has occurred. Since January 1, 2015, there have only been six instances where the 50-day exponential moving average (EMA) has crossed the 200-day EMA. (Exponential moving averages give more weight to recent prices, while simple moving averages weight all data points equally. Using one over the other is a matter of personal preference.) It’s even rarer for Ethereum’s ETH, which has only experienced three Golden Crosses since 2017.
But both are about to do it again, with BTC 2.4% off one and ETH 2.1% off. Looking at them now, you need to determine if the assets are approaching something worth focusing on, or just something to talk about. The results are interesting.
After previous 50-day/200-day golden crosses, BTC gained 4.4% in the following seven days and is up 9.6% in 30 days. However, you cannot look at these returns in isolation. What is BTC doing on average across all 7 and 30 day timeframes? Worse than just after gold crosses at 1.6% and 7.5%, respectively, turns out. In fact, historically, there is an advantage when these moving averages cross.
The best 30-day return came when BTC surged 67% in April and May 2019 after a golden cross. The worst period was the 18.2% loss in May and June 2018.
For ETH (the second largest cryptocurrency by market cap, behind BTC), golden crosses were not a bullish indicator. The average seven and 30 day results were losses of 2% and 8%, respectively. A buy-and-hold strategy made a lot more sense for ETH than simply lengthening the asset based on a moving average. This statement is heavily influenced by ETH’s average 7-day and 30-day performance: gains of 1.5% and 7.3%, respectively.
Surprisingly, gold crosses have also been quite rare in more traditional asset classes. For example, I looked at three major US stock market indexes: the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite. The S&P 500 has seen three gold crosses since early 2015, while the other two benchmarks have had five. Each subsequently posted positive 30-day returns. The Nasdaq led the way up 1.5%, while the S&P 500 returned 1.15% and the Dow gained 1.13%. I’d argue that none of these returns are worth getting overly excited about.
However, taking a step back, four of the five assets examined (all except ETH) saw positive gains 30 days after a gold cross. Over time, I think it makes sense to apply the same process to a broader range of cryptocurrencies to identify patterns, if they do exist.
In an open mind, I wrestle with the importance of the gold cross for crypto given the causality versus correlation debates. I also believe that the traditional 50-day/200-day moving average time frame is more applicable in traditional finance than in this new frontier of digital assets. Time and testing will decide. Finally, I have to wonder if the rarity of crosses means they deserve extra attention – or none at all. I think the truth is somewhere in the middle, with the overarching message being that no single indicator should be viewed in a vacuum.
In the wake of the 2022 bloodbath, those not paralyzed by the shock seem extremely optimistic and loving. The CoinDesk Market Index (CMI), our broad cryptocurrency market benchmark, is up 40% in 2023. Bitcoin (BTC) up 37%. Even Solana’s SOL is up nearly 150%, rebounding after falling heavily after supporter Sam Bankman-Fried fell.
It’s not just crypto. Tesla (TSLA) shares are up nearly 100% from their lows a month ago. Meme-stock favorite Bed Bath & Beyond (BBBY) rallied so sharply despite the company facing possible bankruptcy that the company announced it would sell equity to raise the cash it needs. Ryan Cohen, a meme stock investor, is making moves again with Nordstrom (JWM) and Alibaba (BABA). Cathie Wood boldly declares that her ARK Innovation ETF (ARKK) is “the new Nasdaq,” having soared 40% in January (while underperforming the Nasdaq 100 by almost 80% over a five-year time horizon). What’s going on here?!?
It appears markets have returned to a 2021-style bullish mindset as the Federal Reserve has slowed the pace of rate hikes. That shows the front end of the US yield curve. Just look at the difference in yields between 6-month and 12-month Treasury bills; they are pricing in a Fed rate cut in the third or fourth quarter of this year. (Longer-term yields are now higher than short-term, which leads me to make this observation.)
After last week’s Federal Open Market Committee (FOMC) meeting, which resulted in just a 25 basis point hike in interest rates, traders took Chair Jerome Powell’s relatively balanced comments as an indication that the central bank was backing up its efforts to tame inflation Rate hikes will soon slow – fueling inflation – continued buying spree in the markets for anything and everything that isn’t tightened.
The so-called “bond king” and Chief Investment Officer of Doubleline Capital, Jeffrey Gundlach, has noted that the Fed has historically set its policy rate based on the two-year Treasury yield with a lag. As the two-year yield exceeds the Federal Funds Effective Rate, we see this leading indicator of future interest rate expectations calling for cuts. But the real question is the immediacy and timing of cuts. So how fast is it now?
If we look at the last two rate hike cycles (see below), we can see that the two-year yield was below the policy rate for one year during the 2016-2019 cycle and two years during the 2004-2008 cycle. Both of these periods point to higher interest rates for longer than the six months the market has priced in.
Inflation expectations (as derived from Treasuries including inflation-linked TIPS) are falling from their 2021-2022 peak but are still above average levels after the 2008 financial crisis. This is great news, but should be taken with caution as the Fed itself holds a sizeable share of the TIPS market (estimated at 25% in 2022, according to Jim Bianco), which could distort the signal sent by this indicator. Add in last Friday’s stronger-than-expected jobs report, mixed with lingering concerns about the effectiveness of the Phillips curve, and you have conditions of significant uncertainty that could force the Fed to wait before cutting rates to minimize the likelihood of one policy error.
In other words, we may be approaching peak Fed pressure on the economy, but are still unsure how long the pressure will last. So far the economy has been robust and in good spirits, but the inflationary temperament remains. The Fed appears to be less aware of the economic pulse than it once was, which is being confounded by market distortions and supply chain reverberations from the coronavirus pandemic. We can only hope that the Fed will catch up decisively with the economy if the patient suddenly collapses.
From CoinDesk’s Nick Baker, here is some breaking news worth reading:
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