Psychologists have noted that the human mind acts as a sort of "immune system" when large dramatic events transpire.
That is why it's typically better to suffer a leg break than endure a minor, but chronic, knee "tweak."
The break allows you to psychologically reevaluate but the "tweak" simply hurts.
The crypto market has experienced a "tweak," and this is why sentiment is so low. It's also perhaps misplaced.
1 A "Gentle" Correction
Since December 16, the TOTAL has been declining. We are now at levels last seen on November 21.
The market simply got ahead of itself--moving up too much too quickly. On Dec 16, it stood at some 34% above the 200-day moving average.
Rather than collapse back down to a more reasonable level, we have instead seen a slow unwind. This is about as good an outcome as you could expect. Now, the market is finally in a position to rally again.
2 But Why Would the Market Rally?
One reason turns on the probability of the Federal Reserve ending Quantitative Tightening (QT). The most recent FOMC minutes indicated that the Fed is concerned with market liquidity and it has been slowly tapering the pace of QT for months.
As the Fed is unlikely to cut interest rates in the next two meetings, one action they could take is to pause QT. This is not the same as beginning its opposite, Quantitative Easing, but alt-coin rallies have only required a pause--historically.
3 The Purchasing Manager's Index
The only reason we want an end to QT is so that there is a sufficient level of liquidity in the market to support a rally.
An alternative might be that the economy is simply strong enough and that people have spare cash. When the PMI clocks above a 50, those conditions are met. The current level is above that reading.
Moreover, rises in the PMI have a strong correlation with Bitcoin (and alt-coin) increases--see the chart below with the PMI in blue and BTC in orange.
Note that the chart is plotted on a monthly basis, so it's a slower-moving indicator. But for that reason, we can have a bit more confidence in the trends it identifies.
Presently, the PMI has not only been trending up, but is expected to continue to trend higher.
Expanding GDP does translated into higher overall prices for risk on assets--like cryptos.
4 Too Much Pessimism
This is the only time in $ETH's history wherein the first two months of the year have logged negative returns.
It is only the second time in $ETH's history wherein February has not logged a positive month.
This is only the 3rd time in $BTC's history wherein February has not logged a gain.
For $ETH, both 2018 and 2022 had better yearly starts at this point.
5 Concluding Thoughts
There are reasons to think that the near-term future is likely to be better than the first couple of months of the year have been.
Our "gentle" correction has brought assets back to a point that makes them more reasonably valued. QT may end in March. The PMI indicates that the economy is strong and perhaps growing. And the historical performance of majors, such as $ETH, suggests that pessimism may simply be overdone.
As always, DYOR. NFA. But there are reasons to be optimistic.
Happy Trading!!
-Sebastian Purcell, PhD
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