Monday thoughts on equities, crypto, and a trade in rates

S&P futures sold off on Thursday and Friday and then partially recovered. Price completed some unfinished business by closing the gap from last weekend, and I think the market is setting up to take the next leg higher. The wicky nature of last Thursday and Friday’s selloffs suggests that dip buyers remain in control, and that shorts will be put under pressure if the market trades back up to 6920. I’m still bullish equities and continue to trade from the long side.

S&P futures 4 hr chart

Crypto continues to trade soggy. There is nothing about recent price action that changes my mind about the cycle topping out. In fact, DAT Ethzilla had to sell ETH last week in order to close their wide discount to NAV. The boom/bust cycle of DATs has played out exactly as I expected, and the final stage where shareholders clamor for the DATs to sell spot is now beginning.

ETH daily chart

ETH is carving out a topping pattern with lower highs and support at 3650. If that support goes, I wouldn’t want to be long. I also don’t like shorting crypto because the success rate of shorts is low and the squeezes are brutal, so I’ll just watch from the sidelines with my bag of popcorn.

Joseph Wang’s commentary last week on how the Fed will have to inject more liquidity was one of the more interesting pieces of commentary that I read last week:

The Fed is expected to stop QT by the end of the year in part due to rising repo rates, but repo rates will continue to increase even after QT. The Fed perceives higher repo rates as a sign that reserves have become scarce and are eager to avoid a repeat of the September 2019 repo spike, which they link to over doing QT. Reserve levels can impact repo rates through the bank lending channel, where lower reserve levels mean banks have less cash to lend into repo. But repo rates are rising in large part due to an increasing demand for repo financing, so just looking at the supply of cash is incomplete. Without a change in fiscal policy, any amount of cash will ultimately be exhausted.

A steady expansion of the Fed’s balance sheet is the most likely way to meet the growing financing demands of the Treasury. The Fed could do this through its standing repo facility, where it lends according to the needs of repo borrowers. The facility has so far seen limited take-up and does not appear to constrain repo rates. They could also buy Treasury bills to add reserves into the banking system, who could then lend them into the repo market. It is also possible that commercial banks could increase their lending in repo by expanding their balance sheet and not just shifting the composition of their assets, but that is not likely under current regulations and spreads. The end of QT is coming soon, and further growth in the Fed’s balance sheet will necessarily follow shortly.

I tend to agree with his analysis. At some point the Fed will have to address the growing symptoms of insufficient bank reserves and inject more liquidity into the system, just like what they did in 2019. This will propel the next leg of the equity bull market.

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