Summary

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After the almost holiday week in the USA due to the Thanksgiving holiday, we are back to normal market activity. This week we have important data ahead of us that are very sensitive to the current market conditions.

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We are still in the middle of the crypto storm after the fall of the FTX-Alameda giants. As we said last week in our newsletter, we can expect to see the effects of the contagion in the ecosystem until the end of the year. It is time to be very careful and know how to discern between facts and realities vs. rumors and panic. What is a reality to be taken into account is the stress that the miners are going through, which could be another catalyst for selling pressure in the market.

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Macro analysis

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Relevant data for this week:

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- Tuesday: Speech Powell, GDP USA

- Wednesday: PCE, ISM USA

- Friday: US Unemployment

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In the chart above we show the evolution of the SPY, marking the relevant events of the last weeks. All option expirations (OPEX) and market sensitive economic data. It is noteworthy in what situation the market awaits the battery of data this week, a situation of extreme complacency with the VIX marking levels of 20. Note that the end of all "bear market rallies" this year have occurred when the VIX has approached these levels.

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En Europa obtuvimos datos relacionados con la actividad económica y de manufacturas (PMI), que muestran un claro entorno de contracción (PMI<50)

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All indications are that these low economic activity figures are a prelude to a decline in supply-side inflationary pressures.

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In 2023 the market will have to start dealing with reality, a decline in corporate margins and profits, and begin to put aside the short-sighted and certainly infantile rhetoric of the Fed's PIVOT. The downside risk to earnings by 2023 is a reality, by 2022 (excluding the energy sector) is just 1.2% growth, which is well below the rate of inflation. As of today, the market is still estimating earnings growth for 2023 of 2.9%, which in our opinion still errs on the side of the usual analyst optimism in terms of future earnings estimates. It is very difficult for the market to take into account the structural energy problem, the new geopolitical reality and the Covid spike in China, which is maintaining its zero-covid policies with an iron fist.

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The following table shows how recessionary bear markets tend to bottom out when:

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- PMIs are well below 50

- Unemployment rate increases by 1.3%.

- Future expected earnings are revised downward by 10 %+.

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None of the conditions are met today and are unlikely to be met until the first and second quarters of 2023.

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Winter is approaching and the conflict in Ukraine with all its major collateral effects is not abating. Oil inventories in the USA are outside any historical series and even the German regulator warns that if by February 1 its gas reserves fall below 40%, rationing will be inevitable. At the same time, the head of the Bundesbank stressed that the energy crisis, the fall in economic activity and the frenetic rise in interest rates could put the German financial system in trouble.

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Covid is once again hitting China, which insists on its strict zero-covid policy. This is not a minor issue, we all know that China is the factory of the world and a shutdown of its activity affects the rest of the economies and therefore its companies. Each week of lockdown is estimated to affect 1 Billion of lost iPhone sales, it is likely that approximately 5% of iPhone sales are discarded due to these massive closures in China.

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The aggressiveness of the Fed's rate hikes is evidenced by the following chart:

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We are seeing the deepest yield curve inversion in 40 years and as is well known, most recessions do not begin until we see some steepening from the lows. The market lives on immediacy, however in the macroeconomic sphere everything takes time for the effects and consequences to materialize.

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Cryptoassets | Derivatives and Onchain Metrics

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Interesting week in terms of sensitive data for the markets and to start assessing whether the correlation between classic assets (SPY and QQQ) and cryptos is still valid. As we explained in the previous newsletter, it is necessary that at some point this correlation ceases to exist for the ecosystem to find its true raison d'être.

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Bitcoin

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Numerous on chain metrics and option market readings show us market climaxes, however we stress the importance of following above all the price action which will give us many clues to the next market move.

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Our main scenario remains a reversal of all the selling pressure after the FTX event with a view to the main vpoc (volume point of control) of around $19200, but for this to happen the market must consolidate the HVN (high volume node) below 16600, this is the first battle that buyers have to win. We go a little further inside to observe the price action.

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After shaking the FTX lows, demand reacted in a very genuine way reaching the VPOC at 16600. However once the value was reached, the market started to sideways and overlap showing a clear loss of buying momentum. A red opening of the US stock futures has triggered selling at the start of this week. It is generally said that market floors are processes and market tops are events. We will continue to keep a close eye on price action within this blue value area marked on the chart. Demand is trying, but it must successfully consolidate control of the 16600 level and move quickly to the top of the range.

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The order book remains strongly protected on the downside, and with some relevant moves on the upside, it appears that the upper boundary wall has partially disappeared and has moved in smaller amounts to the $17600 area.

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The skew, which measures the difference of the IV (implied volatility) of OTM puts and the IV of OTM calls has begun to relax away from extreme readings associated with panic and climaxes reminiscent of the final moment of the January, May and June declines.

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The Dvol (Bitcoin volatility index over 30 days) has returned to normal levels and does not seem to discount future violent movements for the time being.

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In terms of delta (market aggression) on Binance perpetual futures it appears that the strong selling pressure has subsided, with some buying inflows over the past week, we will be watching closely this week as to which hand is in control within this blue marked value area.

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In this edition of our weekly newsletter we will delve into other interesting on-chain metrics that show us the deep stress the market is undergoing and that are perfectly extrapolable to similar moments experienced in the past.

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MRV = bitcoin price / realised price.

Realised price visualises the average price all current unspent bitcoins where purchased for.

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SOPR shows if market participants are moving bitcoins to take a loss or book a profit.

SOPR<1 occurs when mostly losses are moved to the blockchain

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As we can see these metrics indicate that we are going through a stress similar to the capitulation processes of previous phases. The moment is critical and it is easy to think that the maximum pain has already taken place, however, be careful with mining, if bitcoin goes below the "production cost" the selling pressure could continue, as miners will have to capitulate in their reserves and even in their activity.

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Ethereum

With no notable changes from last week, the market remains above the buying control. Any bullish scenario requires the breakout and consolidation of $1225 which is acting as the control level for everything we are seeing in the chart below. If the market really wants to reverse the prevailing situation, the value area marked in white has to show clear signs of re-accumulation. On the other hand, a breakout and test inside to lower buyer control will trigger selling and a total takeover by sellers.

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Classic markets

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Last week the market, taking advantage of a low activity due to Thanksgiving, managed to break through the selling control of 3980, something it failed to do in previous weeks.

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This week it will be up to it to validate that breakout and it will have to do so in the face of a battery of highly sensitive data. The key level for the week remains 3980.

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We again emphasize the absolute complacency of the market with a VIX at levels of 20 and that it has been in previous weeks' bullish impulses clear end of the road.

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The market continues to insist on ODTE (0 days to expiration) options, continuing this dangerous game of intraday leverage after OPEX. The avalanche of purchases of ATM and ultra-short-term expiration calls is completely changing the classic functioning of gamma models and thus the hedging activity of Market Makers, who in this case must cover their sold options by buying underlying and forcing the market even further upwards. But let's remember, this ODTE options dynamic is more akin to gambling than to genuine demand positioning.

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The bull market has an enemy it did not have before, the QT of the Fed's balance sheet. It is important to follow how this drain on the liquidity present in the system can affect financial asset valuations. At the moment there seems to be some overvaluation, which could be accentuated as the FED continues its balance sheet reduction program, which according to JPM will be at a rate of 60 Billions per month in 2023.

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JPM expects Fed balance sheet to reduce by $60B/mo through 2023

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These dynamics in the options market may be one of the causes of the disconnection of the SPY and the tech stocks it contains. This is not a trivial issue and for us it is a clear red flag.

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Although it may seem absurd, the idea that Apple is holding up the market is not at all far-fetched.

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