INTERMARKET ANALYSIS: Where Bitcoin Fits In
George Samman encourages everyone to quickly go through the slide deck to check the pulse of the global economy. The macro environment looks like one of deflation rather than the inflation that central banks were trying to create.
[Editor’s note: the charts included in the article below represent 50, 100, 200 daily and weekly moving averages]
This is part of a larger presentation I did at Coinagenda. See the complete slides here. I encourage everyone to quickly go through the slide deck to check the pulse of the global economy. The macro environment looks like one of deflation rather than the inflation that central banks were trying to create. These charts show failed global central bank policy.
In this presentation I use simple technical indicators: the 50, 100, & 200 day exponential moving averages for the daily charts and weekly charts and the Relative Strength Index. The reason why is because the charts really speak for themselves. Almost every chart here is below its trendlines on a daily and weekly chart.
What Is Intermarket Analysis?
Intermarket analysis is a branch of technical analysis that examines the correlations between the 4 major asset classes: Stocks, Bonds, Commodities and Currencies. It does this in an attempt to combine all markets into a unified and coherent whole because no market moves in isolation, the world is interconnected. Finally, it bridges the gap between fundamental, economic, and technical analysis.
Traditional Intermarket Relationships
In intermarket analysis there are key relationships which work. We use these to figure out where we are in the world. Below I will list them before we get into our analysis. Much like a doctor checking out the health of a patient this is how we get check the health of the global economy.
The U.S. Dollar trends in the opposite direction of commodities. This is mainly due to commodities being priced in dollars. A falling dollar is inflationary and usually coincides with rising commodity prices. A rising dollar has the opposite effect. Therefore, a falling dollar is bullish for commodities; a rising dollar is bearish. This is called an inverse relationship.
Another key intermarket inverse relationship is between Commodities bond prices. They trend in opposite directions. Rising commodity prices are a sign of inflation, which puts upward pressure on interest rates and downward pressure on bond prices. Bond yields and bond prices also have an inverse relationship.
Therefore, commodities trend in the same direction as interest rates (bond yields). What this means is rising commodities coincide with rising interest rates and falling bond prices and falling commodities coincide with falling interest rates and rising bond prices.
Another traditional relationship is that bond prices trend in the same direction as stock prices. In an inflationary environment, stocks react positively to falling interest rates (bond yields) and rising bond prices. Low interest rates stimulate economic activity and boost corporate profits.
Companies are also able to refinance at low interest rates as well as issue debt. As interest rates fall and the economy strengthens, demand for commodities increases and commodity prices rise.
According to John Murphy, the father of Intermarket Analysis, these relationships have changed or been enhanced because we have entered a deflationary period. There have been 3 major deflationary events in the last 15 years.
The first one was the 1997-1998 Asian Crisis (Contagion) followed by the dot com bubble which burst in 2000 and finally the Great Recession in 2007-2008. When deflation is the main threat, stocks and commodities become closely related. Also, bond prices rise while stock prices fall.
New Normal Relationships in Deflationary Times
The inverse relationship between the dollar and commodities has an even stronger link in deflationary times. Also, stocks and commodities trend in the same direction because during deflationary events prices go down while bond prices go up.
This gives us the final rule, which is during periods of falling prices for both stocks and commodities and rising bond prices: Falling Bond Yields have hurt Stocks-until recently.
The reason for this is Federal Reserve Policy. Quantitative Easing (QE) has provided loose money, which has flown into risky asset classes like stocks and at the same time they have suppressed interest rates all along the yield curve. This has led to capital flows into equities, housing, etc.
Where are we now?
The US Dollar is surging and has broken through resistance to 5 year highs (see charts below). This is a major change and below there are many reasons why:
- Abenomics has failed to stimulate Japan, the Eurozone is slipping closer towards deflation;
- Chatter that some at the Federal Reserve want to raise US interest rates sooner rather than later and the market perceives this;
- The end of QE4 is near and the last 3 times QE ended the stock market sank;
- It’s still the ultimate flight to safety because it is the most liquid market in the world.
A rising US Dollar is affecting all of the major asset classes negatively, including Bitcoin. A rising dollar results in lower foreign currencies and stock markets (see charts below).
As the chart below shows, with US dollar strength all other currencies have been down versus over the last 200 days. The US stock market has been the strongest stock market in the world and with a strong currency this makes sense since investment funds tend to flow toward countries with stronger currencies. The reason being is that stronger economic conditions currently exist in the US and many believe that interest rates will be going higher as a result.
In the presentation slides you will see that these patterns hold in 2 time frames -daily charts that go 1 year back and weekly which go back 5 years. When doing this kind of analysis, it is important to use multiple timeframes.
The reason being is that the longer a trend is in place, the stronger it is. Another reason is that if a trend that has been in place for a long time changes; it is something to take notice of and pay attention to (like the US dollar chart).
The chart below shows the performance of dollar versus commodities. Notice the negative correlation. When the dollar began its historic rise, commodities began to decline.
Since stocks and commodities follow each other closely, we began to see a correction in the S&P soon thereafter. The chart below shows that as the US Dollar has risen, the S&P has fallen, and as commodities have fallen stocks have followed.
It also shows that now as yields have fallen, stocks are falling with them. This shows that there is not a lot of confidence in a global recovery and money is moving out of risky assets. This is very deflationary. At the bottom of the chart is the correlation between equities and the other 3 major asset classes.
Below is a chart of Bitcoin. Please see the presentation for further analysis. While the data set is small, Bitcoin has begun correlating to other asset classes just like a commodity would. It is negatively correlated (goes down when USD goes up) with a rising dollar and positively correlated (rises and falls with them) with other commodities like silver and gold. It would look essentially the same for copper and oil as well.
Since no market or asset class moves in isolation, it is important to look at the whole picture and try and figure out the patterns of global capital flows.
The US dollar has been controlling the intermarket picture and is causing deflationary misallocations of capital. The central banks of the world will have to fight this to avoid a global deflationary crisis. Any type of policy which central banks use to stave off deflation and try and spark inflation will be positive for commodities and equities.
With the US dollar so strong, we can start to expect government interventions from other currencies to try and help their own currencies as well. This is not a picture of global health, rather a warning signal that deflation is winning the battle at the moment.
Another conclusion I draw is that Bitcoin is not a currency, it’s a commodity. While it is hard to use correlation analysis for such a small time scale (less than 5 years of BTC data), we always try and find patterns in data and then see if those conclusions hold.
Essentially there are a number of reasons for this and some I paraphrased from two bit idiot’s blog post while also showing this through the chart pack. Here are the reasons:
1) No instant way to settle for dollars
2) Currencies don’t drop by more than 50% without being devalued (think George Soros and the Cable)
3) It is predictably “scarce”
4) Price is only rising with adoption and speculation. It goes through boom and bust cycles.
4) It is “mined” vs printed.
6) It is taxed as property in the US
7) It needs adoption of sophisticated derivatives if it’s going to be held for periods of time.
About the author
George Samman is the co-founder and COO of BTC.sx, the world’s first Bitcoin-only trading platform. He is a former Wall Street Senior Portfolio Manager and Market Strategist as well as a technical analyst. He holds the Chartered Market Technician (CMT) designation. A seasoned trader, George has over ten years of experience in the financial markets.