Market Update: 21 Sep 2020

The market intermission after Round 1 has now ended and we look towards Round 2 of the correction into the September quarter-end now. Foremost on our minds are 3 questions:

1. Will this be like the March quarter — when markets took a huge hit into the quarter-end?

2. Or more like the June quarter — when a record amount of expiring options kept prices pinned into the expiry, before rallying out of the range the following month.

3. And how will Defi cope should a March-type liquidation event take place again

To that our current prognosis is:

We think market fundamentals has echoes of March rather than June — however with the MMT rubicon effectively crossed by global central banks, liquidation events wont be of the March severity but rather of a heavily positioned market quickly deflating.

Since early this month we’ve been increasingly conservative & cautiously awaiting a sharper correction. We’ve now had the retest of 11k in BTC & (almost) 400 in ETH — and we think this week and next is where the rubber meets the road.

i. Equities have quietly logged three bearish weeks in a row now (and off to a horrible start for the fourth today) — this is now shaping up to be the worst month & longest losing streak in over a year now.

ii. This is being driven by unwinds in the market darling Tech sector — with high profile short sellers such as Michael Burry (Big short guy) coming out of the woods and very publicly calling the Tesla valuation out.

iii. We think this could get worse as institutional profit-taking cascades into retail stop-loss selling, especially into the November elections when everyone wants to run a clean book. BTC is especially vulnerable to these type of unwinds.

iv. This period is the ultimate worst for risk assets — in the past 30 years, the five days from the 20th to 25th Sep (this week) has the worst rolling 5-day return of any 5 days on the calendar.

v. Gold is particularly vulnerable as well — as historically all the groundbreaking financial events seem to happen in this period — something that very much concerns BTC now.
1. Great crash of 1929 market topped on Sep 21, 1929
2. UK abruptly left the Gold standard on Sep 21, 1931
3. Plaza Accord (last major manipulation of currencies among the G5 nations) happened on Sep 21, 1985
4. The LTCM bailout was on Sep 23, 1998
5. Lehman filed for bankruptcy on Sep 15 and the Bush administration & Congress were forced into the Sunday US$700bn bailout talk on Sep 23, 2008
5. The first ever major bull-run for Gold in the 70s topped on Sep 22, 1980 — a top which lasted all the way until 2008
6. Gold then went into a major 20-year downtrend that bottomed with a 33% surge over 10-days that began on Sep 21, 1999
7. The next 12-years saw a parabolic rise, aided by QE, that topped on Sep 21, 2011 — leading to a 15% decline in 3 days

For the more in-tuned, a major catalyst for this period is the powerful Equinox (Sep 22–23) which has a major influence on human behavior. The Department of Neuroanatomy at Yale Medical School wrote that “the human nervous system typically undergoes major measurable perturbations in the mid-March period and late-September.”

Typically we tend to ignore this from year to year — but this being 2020 and after what happened in March, we are definitely keeping our eyes peeled wide open, watching Equities & Gold very closely. The Fed speak many times this week, but we suspect that with the election so close, they will be politically hamstrung to make any big changes, just as they were at their meeting last week, and we expect more pre-election position squaring to begin in earnest should we not get any increased dovishness from them.

We will follow up tomorrow with a detailed technical analysis of BTC, ETH and the cross asset markets including S&P, Gold and USD

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