Liquidity Update for Stocks & Bitcoin

and a word about that "Bitcoin correlation"

Time for an update on pH-Liquidity in both the stock market and Bitcoin here at the end of Q2-2022.

First the stock market: 

 

 

As you can see, pH-L has continued down after breaking its 2-year (green) uptrend line at the start of 2022, and the stock market has dutifully followed in what still looks like an ongoing correction in the Bull Market off the 2020 lows.

To remind, this indicator measures not just what the Federal Reserve is doing with liquidity in the financial system, but how the stock market is pricing it. It measures Net Free Reserves in a ratio with stock market prices and a long term constant of pricing power.

In order to expect a new leg up in stocks, the indicator would have to break through what is now the (red) downtrend line constraining both monetary conditions and stock market buying power.

I will update along the way.

 

* * *

 

Next for Bitcoin: 

 

 

Here, too, we can see that Bitcoin pH-L did not hold at its uptrend off the 2020 lows, as hoped.

Once the (green) uptrend line was penetrated, the real down trend in price accelerated, and we now find BTC in a very sharp selling phase that has all the feeling of previous washouts, which not only caused liquidation of most short term speculators, but produced the kind of calamitous sentiment that called for “the death of Bitcoin” for, I don’t know, the “umpteenth” time and counting…

Like with stocks, Bitcoin pH-L here will have to penetrate the newly formed (red) downtrend line to tell us price is ready for its next run up.

I will update periodically.

 

* * *

 

Finally, a word on the so-called “Bitcoin correlation.”

As the schadenfreude police are now out in full force declaring their “I told you so’s,” I would only suggest that in corrections of the type we’re now undergoing in both stocks and crypto, which are governed by quickly souring macro sentiment such as we are witnessing -- which measures at an all-time low on most of the Consumer Sentiment indexes -- virtually everything becomes correlated.

At the moment, stocks, bonds, crypto, and even commodities are selling off in lock step. So of course the correlation is high. This is what happens when Bear Market forces take over.

But to say that this proves that Bitcoin and growth stocks, or Bitcoin and the Nasdaq, or Bitcoin and oil, gold, or fill-in-the-blank are therefore “correlated,” well, this is just the “truth du jour…”

Arguments like this draw attention to those making them, and they should be enjoyed by same for as long as they last.

But sorry, this, too, shall pass.

Bitcoin has nothing to do with stocks.

And long term, this “correlation” will revert to very low levels which I believe will continue to make crypto a good candidate for diversification in portfolios -- not necessarily for the “fifteen minute news cycle” crowd, but for the long term where serious portfolio construction can make room for newly emerging assets that not only will survive, but thrive, as times change and investment strategies inevitably evolve.

 

* * *

 

Richard Lees and clients of Richard Lees Capital Management may be long cryptocurrencies mentioned in this article. Clients invested in any of RLCM's managed digital portfolios have undergone thorough risk evaluation to deem these investments appropriate for them, as should anyone considering speculative investments. A quick questionnaire about risk tolerance, like the one below, might shed light on such a tolerance:

 

 

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