Market Commentary
Market Commentary: Capitulation
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Tuesday, May 10, 2022

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Broader market pessimism, a five-week digital asset losing streak, signs of capitulation, and a significant deviation from trend serve as attractive opportunities to buy in the face of uncertainty.

Key Takeaways:

  • Despite a positive rally following the Fed meeting on Wednesday, bitcoin, ether, and equities have rolled over into new year-to-date lows. We provide some talking points related to this macro-pullback
  • On-chain, the Spent Output Profit Ratio (a measure of transaction profitability) suggests capitulation with on-chain transactions at a 13% loss, similar to the macro bottoms in July 2021, March 2020, and December 2018
  • Bitcoin is now off 33% from its 200d moving average, a meaningful deviation from its longer-term trend and a sign of “value”

THE BIRD'S EYE VIEW

With the fifth straight week of both equity and digital asset losses, it goes without saying that the market is experiencing an extraordinary period of volatility.

While participants were rather pleased with Fed Chair Powell’s 50bp rate hike and Q&A session in the Fed’s May meeting, price action rolled over on Thursday and Friday and into Monday’s trade as well.
This weakness across major equity indices, sectors, and factors led to new lows by the end of last week, which ultimately spread to bitcoin and ether as the two broke year-to-date lows on Monday the 9th as well.

While $35,365 on January 23rd was the prior closing low of this 2022 year (with $32,970 the intraday low), bitcoin now closed Monday, May 9th at $30,959 (lowest since July ‘21). Ether closed the day at $2,292, still higher than the intraday lows of $2,160 in January of this year.

But this incredibly quick pullback –  after reaching nearly $40,000 following the Fed meeting on Wednesday, is one of the quickest five-day losses in bitcoin’s recent history:

And as we often say at the risk of sounding like a broken record, this pullback continues to be tied to broader macro conditions rather than idiosyncratic weakness within bitcoin and/or ether. Some quick talking points related to this correction:

  • Risk assets placed synchronous highs on uncertainties related to the Fed in early November, and for many months, bitcoin and ether held the lows printed in late January. Significant weakness in equities has led to new YTD lows across almost all assets stated in our "Tantrum Table" on the Key Market Data section of this article
  • For perspective, the Nasdaq Composite is now down 27.6% from its 52wk highs, not much different than the 30.1% experienced in the infamous Covid-19 drawdown
  • “When volatility rises, correlations go to one”: 30D correlation reached 0.87, 0.89 for bitcoin & ether vs. the Nasdaq
  • The dollar has strengthened significantly, with EUR/USD the lowest since 2017 and the DXY the highest since 2002
  • Crypto market stress on May 9th was exacerbated by concerns around popular Terra-stablecoin UST, which lost a dollar peg, declining to $0.60 before rapidly recovering
  • The five-day percent change for bitcoin was a 2+ standard deviation move and the greatest five-day decline since May of ‘21 (in which BTC then rallied 70% in the next six months)
  • On-chain indicators show signs of capitulation, with Spent Output Profit Ratios (SOPR) of 0.87, similar to the macro bottoms in July 2021, March 2020, and December 2018
  • Bitcoin is now 33% below its 200d moving average, a significant difference that indicates value vs. long-term trend

And so, as markets are likely to remain volatile, it’s important to consider the macro storm that’s already occurred and the bearishness that participants feel now that the price has moved lower. But as we continue to say, this sets up for a “not all that bad” rally as concerns prove to be overdone.

With signs of capitulation seen yesterday through bitcoin’s SOPR alongside a large deviation from the 200D moving average, these levels are certainly attractive for long-term investors.

SIGNS OF CAPITULATION

One way to assess near-term sentiment is the entity-adjusted SOPR, or Spent Output Profit Ratio. This ratio assesses the profitability of on-chain bitcoin transactions by comparing the price in which bitcoins are transferred out of a wallet, versus the price in which they entered (adjusted for same-entity transactions.)

The metric provides insight into the aggregate profit and loss of bitcoin that is changing hands, and extremes can give insight into the market’s sentiment at various points in time.

On Monday May 9th, the entity-adjusted SOPR reached a 26-month low of 0.87, indicating that aggregate bitcoin transfers on this day were at 13% losses – this is a sign of capitulation.  The last time this number was below 0.90 was in late January of 2022 – right as bitcoin rallied from a closing low of $35,365 to $45,767 by the end of Q1.
Other notable entity-adjusted SOPR ratios at lows are:

  • 0.90 on 7/20/2021, the closing low of the 2021 year
  • 0.71 on 3/13/2020, during the Covid-capitulation
  • 0.81 on 12/14/2018, the bitcoin low prior to the tariff-war equity bottom on 12/24

BITCOIN’S DEVIATION FROM 200D MA

Following the weakness seen late last week and into Monday’s trade, bitcoin has now declined 33% lower than its 200D moving average of $46,249 versus Monday’s close of $30,959.
The 200d moving average, a simple long-term trend indicator, is significantly higher than bitcoin’s current price.
When looking back at history we can find meaningful deviations between price and 200d moving average for signs of “value” versus its longer-term trend.
Other notable bottoms and percent declines from 200D moving average include:

  • -33% on 7/20/2021, the closing low of the 2021 year
  • -42% on 3/16/2020, during the Covid-capitulation
  • -41% on 12/27/2018, three days following the tariff-war equity bottom

This deviation from its 200D moving average, alongside signs of capitulation illustrated by SOPR, and five weeks of price declines serve as signals of the potential for a relief rally, despite negative sentiment.

Click here for the full PDF. As always, please reach out with any questions or comments.

Stay tuned,

Joseph Orsini, CFA
Director of Research

DISCLOSURES
Investment advisory and management services are provided by Eaglebrook Advisors, Inc., a registered investment advisor. Information presented is for educational purposes only. Past performance is no indication of future results. Please see our Form ADV Disclosures and Privacy Policy in our website.
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About Eaglebrook Advisors
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