Transcription
Hello and welcome back to Braavos Research. This is your host Peter.
Stocks are recovering nicely from their recent correction following Donald Trump's announcement of potential tariffs on China. Overall, the price action that we're getting on the market is very constructive both from a technical and internal standpoint. We're going to take a look at a few charts to understand exactly what is happening today.
You can see we tagged the 50-day moving average, something we talked about on Monday. And the S&P also managed to recover nicely above this resistance, this support I should say, making this look overall like a small V-shaped correction within an a broader uptrend which is really forming very nicely here. So from a technical standpoint, but a very strong posture.
Now, there are a couple of things that are not necessarily dangerous, but worth paying attention to right now. So, we're going to look at those, but we're going to start with overall the positives that we've seen. The S&P 500 is resuming its uptrend here. And what I mean by that is that we're clearing some pretty important levels of resistance here. You can see the 6700 point level that acted as resistance in late September, acted as support here in early October. It broke down through it violently during this pullback and is now, at least as I'm making this video, it's breaking back above this level. So, that really is the level that needs to be cleared in terms of a recovery. And that's what we're getting right now, which is a very positive signal, which overall suggests we should be expecting the near-term price action to be constructive.
So, we went from being overall in a mixed posture with the market battling around this level and being overall rangebound between near-term support and near-term resistance to now being in full-blown bullish posture with price clearing a major level of resistance showing that there has been a tremendous amount of buying and very little selling in this recovery. So, overall very good sign and this is being also accompanied with lower interest rates.
This is the 10-year government bond yield that has been moving lower here, which is overall a positive sign. This is also being accompanied by the Treasury bond ETF that's rallying. And this is, by the way, just the inverse chart of the bond yields, right? Bond prices and bond yields are inversely correlated. And what we're seeing on bond prices is that they're breaking out here above a nearterm price pattern going back to April of 2025. bottomed around here.
Overall, this is good because bonds rallying means lower interest rates generally that the market expecting lower inflation risks which is a good thing for the market and we've generally seen appreciations in the bond market in the past couple years generally be associated with strong price action on the S&P 500 index. As you can see from here, as you can see, overall this rally in bonds coincided with a strong move up in stocks. Not to mention this one right here.
Generally, we've been in an environment where there's been lots of concerns around government debt, lots of concerns around interest rates and the potential for interest rates to impact economic growth, impact stock market valuations. And so every time that you get a rally in bonds and a decline in interest rates, it tends to put upwards pressure on stock prices. Now, of course, we have already been in a very, very strong market. We'll see how strong the effect of any boost of bond prices actually has on the market, but this is definitely helping. This breakout that we're seeing is definitely helping push the stock market to recover very rapidly, which would not be the case probably if bond prices were going in the opposite direction and making new lows.
We'll see exactly how longasting this is. There's certainly a little bit of a trade here with a short-term basing pattern on TLT that could lead to a short-term bond rally here. an 8% target on TLT could lead us back up to $99 on TLT. That would be perhaps a shorterterm target and would probably have a pretty good impact on stocks. It would probably be lifting things like small caps that we're going to take a look at in just a second. The parts of the market that have been more rate sensitive and more sensitive to these low bond prices or high bond yields. This kind of move would give breathing room to those parts of the market like small caps that are already breaking out as I'm making this video.
But given that we don't expect a recession to occur in the near term, at least that's not our base case right now. I would believe that this would probably be a shortterm rally and could be followed by some additional downside, especially if inflation pressures tick up, which is not impossible, especially if there's a little bit of a housing recovery, especially if stocks continue to remain so strong. It could be that the Fed begins to think about stopping rate cuts in order to cool the market down and even consider rate hikes if there's some inflationary pressure. So that kind of scenario, if those things that I just talked about materialize, you're going to see a pretty sharp downwards reversal in TLT. And that could ultimately lead to a recession. If bond yields rise too much, they could pop the market bubble, drag economic growth down, and ultimately that leads to a real bond rally during an economic recession because that's when real bond rallies occur. They occur during recessions like COVID, like of course 2008 where bonds rallied significantly. Point is, we're outside of a recession. So, yes, bonds can rise probably and any upside is going to be relatively limited, but there is definitely a short-term bullish case here on bonds.
As you can see, there's also a potential basing pattern that is breaking out here as I'm making this video. So, there's a bullish setup, something that could even be taken as a potential long trade here on the bond market to diversify the portfolio a little bit. We'll be watching the price action here heading into the end of the trading session. But this is a potential trade here breaking out of a basing pattern and moving averages are not in an uptrend, but they're not in the worst posture here potentially curling upwards. So this is definitely a potential setup here on Treasury bonds.
And as I mentioned, another positive sign that we're getting from the market is the small caps part of the market is surging higher plus 1.5% today. So very very sharp recovery from that brief panic to new all-time highs. Right? So we have this let me show you another chart. This is the chart that we're watching on the small cap index. And you can see it broke down here during this market panic. We held through that. We have a position on small cap. So through IWM we held through that breakdown because of the news nature of that correction that this was based on a tweet and you know overall we didn't have any significant warning signs and we also generally expected this any correction in the market to be relatively shallow and given the violence of it we did not remove that position and of course that ended up being a good call because small caps have immediately stepped back into the channel. So this is what's called a false breakdown which fuels a you know buying pressure straight away right a kind of short squeeze and anybody who got stopped out or whipsawed out of small caps and this liquidation type of move is now buying back in and pushing the index even higher. So textbook false breakdown type of trap and also IWM clearing this line of resistance that we were watching. So overall, very very strong posture on IWM, very strong price action. This is even a setup that could be worth initiating a new trade on because you have a potential entry with potential stop-loss here.
So there's a trade setup here on IWM, especially given that when you look at IWM against the S&P 500, the performance of the small caps versus the large caps, you also have a breakout here that's happening. So something that we've been anticipating and talking about for the last few weeks now that the price action on this chart looked very constructive and you can see it did play out for a nice breakout. You can see if I adjust it slightly, we have a slightly different pattern like this that has just broken out today and that arguably has a measured target of an 8% outperformance from the break. So that would be an additional 7% outperformance from today. So could lead to a pretty strong move on small caps short-term. Again, short term, this is not a massive reversal that we're talking about on small caps. We're not retracing the entire underperformance from 2021, but a short-term bounce here, especially if bonds are breaking out, especially if yields are coming down, market is getting excited about Fed cuts, lower inflation expectations. All of that can push the IWM index in a short-term period of outperformance. That is something that seems to be likely right now given the price action. But again, it would probably be shortterm where as soon as the bond rally ends and inflation becomes a concern again or gradually becomes a concern again and interest rates bottom out, you're going to see a reversal take place on this ratio.
Again, we're not necessarily expecting a major reversal of small caps for now. I would say it's more likely that a larger reversal of small caps happens at the end of this market cycle. So during a recession or in the aftermath of a recession and yes you can see small caps outperform during recessions that happened in 2000 small caps were outperforming right of course because tech stocks were being dragged down. small cap stocks that had been very unfavored and cheapened down in the late 1990s all of a sudden became a kind of flight to safety during the dotcom crash and the 2001 recession. So small cap were performing very very well here and you had some kind of a similar phenomenon during 2008 where for a good chunk of the 2008 recession small caps were outperforming and overall between the beginning of the recession right here and the end of the recession small caps generally outperform they generally outperform the S&P 500 in 1990 it was a little bit different where small caps were underperforming until the middle of the recession until the market saw basically started pricing in the recovery and that's when small caps outperform. So there's many different examples and different ways that small cap performance can actually play out. It depends of course on the underlying fundamentals at that particular moment.
I think the big thing that's holding small caps back today is the high interest rate environment. And so, especially on longerterm interest rates, the small caps have been very, very correlated, for example, to TLT. As long-term bonds have been declining, so small caps have been underperforming. And every time that long-term bonds have seen some kind of a rally, small caps have outperformed. And that's the case today as well. So, similar to what I was saying earlier where I would probably not expect a big rally in bonds to occur until we have some kind of a recession. I would not expect a big outperformance small caps to occur until we have some kind of a recession either during a recession or in the aftermath of one. So, that's the update on small caps. But overall again the price action that we're getting on small caps today is very constructive in the short term and is confirming our bias that the market is still strong in the near term. You want to see small caps outperforming in stock market recovery.
So now there are a couple of nuances to these positive developments that I do want to highlight because no we're not completely out of the woods. First of all keep in mind the market is very overextended. Can it stay overextended? Can it continue higher? despite being overextended, of course, but in these conditions, you know, seeing the market chop around is definitely not absurd to think about. So, that's the first thing.
The second thing is that the VIX is staying relatively high, although since I've started this video, it's cooled back down a little bit. What I want to see is a more substantial decline on the VIX, which tends to happen in the aftermath of these types of corrections. you see this kind of candlestick on the VIX, a big move down on the VIX here, like in 21st of March. That's an example of a big decline on the volatility of the S&P 500. Or this one that occurred on the 1st of November here, 2023, or this one here that occurred on the 23rd of April of 24. These are big declines in the VIX that shows volatility is really cooling down in a big way after having ramped up during a correction. Right? So these are very constructive developments to see volatility break back down, break lower.
If we add the S&P 500, you can see those vertical lines that I put here on those breakdowns did coincide with some pretty amazing opportunities to get optimistic on stocks. Right? So those breakdowns and volatility are really constructive signs that you get at the very beginning stages of a rally on stocks. That's something I want to still see to a deeper extent today. I want to see the VIX cooling back down perhaps down to 17. I want to see that kind of big breakdown in the VIX. That would be very constructive for now. Yes, it's coming back down, but it's still remaining quite elevated. And the VIX only just broke out here. just broke out of this downtrend that it's been in since May. We have a little bit of a breakout in volatility that was triggered by the Trump tweet. Also a break out above this kind of range that the VIX was stuck below 17.3 here and it broke out violently. What I would want to see is the VIX coming back down. Let's say below 18. Below 18, that would be a really very positive sign. Until that's the case, the VIX is still quite high and you could imagine it continuing to go up a little bit more before this is all said and done. And that would coincide with some more volatility, some more consolidation on stocks before this is all said and done.
This is why although we did add a couple trades, the strongest trades that were really on our radar in this correction that we didn't want to miss, GEV and CMT, we're not in a rush to dive into new positions right now. In fact, we're much more looking to potentially cut out our weaker trades, and that includes Microsoft and Amazon that don't look nearly as strong as some of our other trades right now, and that I think would perhaps be vulnerable in the event of another pullback or this kind of consolidation continuing, which is again, we're not out of the woods yet. Yes, the price action has been constructive. Absolutely. And the market is attempting to break out above this resistance which is very constructive. But in these types of corrections, you get all types of signals all over the place. And another violent dip like this that scares off people that liquidates another part of traders is definitely not impossible.
And by the way, when you look at the breadth of the market, this is the percentage of stocks within the S&P 500 that are trading above their 50-day moving average. In this recent correction, we hit 36%. So, what typically happens during market corrections, if I add the S&P, is during the short-term market corrections like this one in March, like this one in April, even this one in October, you tend to see most stocks getting oversold. And you quite often get less than 30% of stocks trading above their 50-day moving average. So, in this correction, we got a little bit oversold, but this was really scratching the surface. we definitely get a correction where stocks get more oversold and just a little bit of an additional pullback, maybe a retest of the lows or just a little bit more volatility could get us to a more oversold reading where the percentage of stocks above their 50-day moving average is below 30%, so most stocks are selling off, which represents a kind of panic. That would be a really interesting place to start looking for a real bottom. It could be the bottoms already occurred, but I wouldn't yet be putting extremely high odds of that being the case given the fact that the VIX is elevated. And well, stocks can often get more oversold than what has already happened in typical garden variety corrections, which is what this is from what we're looking at this correction.
Now, the final thing that's a little bit more on the risk off side of things is Bitcoin. Bitcoin. While the S&P is surging back up towards new all-time highs, the IWM index is surging to new all-time highs. Bitcoin, on the other hand, is not. Now, Bitcoin is still trending up, right? It's still trending up relative to its moving averages. You can see it's struggling. You can definitely see it's struggling. It's failed to break out to new alltime highs now three times. And it's coming back to test this support here. now for the third time this $19,000 level and it's now very very close to the 200 day moving average that you can see here. It wouldn't surprise me to see Bitcoin actually breaking down below this. This is a scenario that we've talked about before that Bitcoin's momentum has been slowing down at each step. Right? The first part of the rally was extremely strong. This one a little less strong. This one a little less strong. And here we've just gotten the false breakout and we're coming back down to the moving averages. From a technical standpoint, this raises a lot of red flags for Bitcoin, which is why we don't have exposure to crypto right now. When we saw this false breakout move, the very early stages here, we immediately look to cut out our exposure to crypto. And of course, that ended up being a good call so far. But it could still be that we have more downside on this. And obviously that's not the greatest thing to see for the markets as a whole. You definitely do want to see Bitcoin thriving if you're in a real bull market in stocks. Now, it's not an essential characteristic, right? It's not an essential characteristic, but it's definitely something you want to see.
Now, if Bitcoin corrects here, it's going to be a very interesting opportunity to buy the dip, especially from a longer term standpoint because look at this. This is Bitcoin against the price of gold. Me just clear up these lines. And you can see from this is a chart that we've talked about quite a few times before that we were generally looking for a breakout on this chart. Right? Our expectation is generally that Bitcoin is going to rise in market cap relative to gold. It's digital gold. It generally should capture at least a portion of gold's market cap. And so I would expect this to eventually break out. But what's happening right now is of course gold is melting up and Bitcoin is struggling and so we're seeing this actually a breakdown in the Bitcoin to gold ratio. So we're seeing this actually break down. That's potentially first of all an early warning of a breakdown of Bitcoin in US dollar terms. That's the first thing that there's just no demand for Bitcoin right now. Everything's going into gold and this technical breakdown is suggesting that perhaps this is something that has lasting power and this could bring this ratio to some key levels of support that we haven't been at since February of 2021. So similar levels to where Bitcoin's market cap was relative to gold in February of 2021. This is quite unbelievable what's happening here. And by the way, this would still be potentially massive basing pattern here, right? Even if it retests to this, this could be a huge bottom that occurs on Bitcoin. If it retests this level and then proceeds to break out later this year or in early 2026, depending of course on the macroeconomic environment and what happens there.
First of all, if this happens, if we come back down to these levels to this trend line, it could be a 25% decline on Bitcoin relative to gold. And given that gold is extremely overextended right now, I would not expect it to rise significantly more. Maybe a few percentage points, but definitely not 20%. It could mean that we're at least due for a 20 to 25% pullback on Bitcoin if this kind of pullback happens. Right? So, let's take a look at where that would take Bitcoin. A 25% pullback would take Bitcoin all the way back down to $83,000, which would be roughly coinciding with this resistance, this support level here that broke out in November of 24th. So, this would of course be very, very painful for a lot of people that are holding Bitcoin right now and expecting it to outperform. And it would be very painful to other coins and other parts of the crypto market that I think are very crowded right now. a lot of people expecting an alt season and crypto to really break out, which has been disappointing. And this false breakout type of price action combined with this breakdown on the Bitcoin to gold ratio could be hinting at this kind of a pullback.
So, we're not looking to increase our exposure to crypto just yet, right? Especially given the price action that we've just seen, right? We had initiated a trade on this recovery here above 118. The initial stages looked like maybe crypto was really getting to break out and it was getting ready to see that melt up and it could have happened but ultimately look at what that turned into. False breakout, false breakout at new alltime highs and Bitcoin coming down to retest once again that level. And the more a level gets tested and fails to really bounce up above it, the more likely it is to break. were definitely worried, let's say, I would say worried about that kind of scenario occurring on Bitcoin and I would need to see big improvement in the behavior of the price action in order for us to get more constructive.
That being said, a correction to $83,000 if that gets us to the support level that we took a look at on the Bitcoin to gold ratio, that could be first of all a huge tradable bottom, right? This could be something that we look at very closely as an opportunity to trade the bottom on. And secondly, it would also be an investment opportunity for Bitcoin because that's something that we haven't seen really since 2022. I would say we really talked about Bitcoin being a good investment since back here. But the fact that Bitcoin is getting so cheap relative to gold tells me there's actually a lot of pessimism on Bitcoin right now. And this pessimism would be quite severe if it were to come down to these levels, right? This will flush out a lot of people that are participating in that trade. And that could be associated with a pretty important bottom on Bitcoin and be an opportunity for a long-term buy for those of you who of course want to be exposed to Bitcoin longer term. That's definitely not the case for everyone, but we generally do think Bitcoin deserves a place in a diversified passive long-term investment portfolio.
Now, in regards to what this means for the market, it could also mean that we're not necessarily out of the woods and that this type of move down in Bitcoin would be associated with some kind of a correction or a consolidation in stocks, right? Generally, the reason I say that is because generally you see stocks and Bitcoin perform in line with one another. They're correlated assets. So, you would expect a struggling Bitcoin to coincide with a struggling market. It's not a perfect relationship, which is something to be taken into consideration with that that there's many times where Bitcoin has corrected without the market correcting, such as this portion in 2021 or such as this portion in 2019 right here.
By the way, this is something we've talked about a few times before, but today's macro environment reminds me a lot of 2019. Fed cutting interest rates, large cap stocks leading the way higher, breaking out to new all-time highs, leading economic indicators generally suggesting a weakening, cooling economic data, cooling inflation, rising stocks, but struggling Bitcoin because this was not a perfectly even recovery and Bitcoin certainly reflected that. What's a little bit different from 2019, however, in in terms of this relationship is that if you look at small caps, small caps were also struggling in 2019 as Bitcoin was struggling. So, this uneven type of recovery was reflected in in small caps. Today, this huge breakout of small caps to new all-time highs that's not being accompanied by breakouts to new all-time highs on Bitcoin is a little bit stranger than usual. We'll see how this resolves. But you know, generally what's the most important to pay attention to is the price action. Small caps are very very strong and that's a great thing. Bitcoin is not strong and we have to respect that. We have to respect what the market is telling us and we cannot be stuck in our way of thinking that just because small caps are breaking out, we necessarily should be bullish on Bitcoin because this is not bullish.
So that's where we are at in regards to our approach on the market right now. If you enjoyed this video, make sure to leave a comment down below. That's very helpful for us to know if you guys are enjoying these videos. If you have any questions, comments, feedback, let us know in the comment section down below. In the meantime, I wish you good luck on your trading and see you next.