Edition #19 - 6.9.2021
JOLTS Climbs to ATH's, Nasdaq-100 Analysis, BTC Illiquid Supply
Economy:
First & foremost, the headline economic data release from yesterday was the Job Openings & Labor Turnover Survey (JOLTS) report for the month of May. The consensus estimate was for 8.2M job openings, but the result was 9.29M, a new record high. I saw the following graph from Bloomberg, but added my own edit to draw the red trend line from the Great Recession lows.
It’s definitely interesting to see that the data has seemed to oscillate around this slope for such a sustained period of time, although there was a massive deviation beginning in 2019 & crash from the COVID shutdowns. Of course, this trend cannot & certainly should not last forever.
From a fundamental perspective, going through periods of growth in job openings can be considered a sign of a strong & healthy economy. As an economy expands due to an increase in capital expenditures & investment, new jobs will become available & it can take time for the employer to find qualified, skilled labor. After some time however, those positions should be filled, economic investment goes through cycles & slows down, and job openings should decline as an economy levels off or contracts.
Context is what’s important here. If job openings are increasing dramatically due to high capital investment & economic expansion, then that’s great news! If job openings are increasing dramatically increasing because employers cannot find qualified labor, wages/benefits are too low, or leisure time is overly incentivized, that’s far from ideal.
One thing that I noticed was how it took the U.S. economy approximately 7 years for JOLTS to reach the pre-recession level at the end of 2007. At the time, that was a JOLTS figure of just shy of 5M, fell to the low 2M range & then recouped. In this current recovery, it took 14 months to get back to the January 2020 pre-pandemic levels. Another difference is that the January 2020 JOLTS data was 7.15M, fell to a low of 4.63M in April 2020, and has doubled in 13 months to 9.29M.
Clearly the labor market has some historically odd dynamics at the present moment. As I’ve noted in reviews of Federal Reserve comments, prior economic data releases, and just general discussions I’ve had on this newsletter about the labor market, there is significant slack in the market right now. In my newsletter two days ago, I even highlighted the low & sluggish labor force participation rate. In Edition #8 on , I highlighted the CEO Confidence Index and included the response that “57% of CEO’s report trouble attracting qualified workers (up from 50% in Q1)”. In Edition #13 on 6/2/2021, I quoted Neel Kashkari who said that it’s difficult to know how much of the labor shortages can be attributed to “generous unemployment benefits”, health & safety concerns, and childcare obligations. Note how he didn’t mention anything about the economy having strong levels of capital investment & an expanding private sector that is hungry for new labor.
This will be an important dynamic to keep an eye on, but I expect continued slack in the labor market until Q4 2020 at the earliest. For the full JOLTS release from the BLS, check out this link.
Stock Market:
I wanted to do an update on what I’m seeing in terms of technical analysis for the Nasdaq-100. At the end of the day, my trading decisions are driven by the signals and setups that I see in terms of price structure & indicators. These patterns and underlying movements are the way I measure psychology. An asset’s price is merely the current level at which buyers & sellers are willing to transact based on their specific, so understanding how buyers & sellers react at historical prices levels, trends, etc. is extremely insightful. The chart we’ll be analyzing begins on March 18, 2020 & goes through the present date and will simply be evaluating price structure.
The chart above is the $NDX beginning from the COVID lows on 3/23 - present. I recommend clicking the photo to view it larger in a separate tab, but we can start to see some discernible patterns in the price action. In Q3 2020, price was at all-time highs but began to consolidate, beginning at point A, which led to a double-digit drawdown in September. Price found an arbitrary point to bottom, then rallied back to the same level as point A, in which it was rejected once again at point C. We can note that each of those drawdowns occurred once price hit a resistance level in grey (which I drew). During those drawdowns, price bottomed at points B and D, in which D > B (as shown by the rising white trend line). Price retested the resistance range again at point E, had a minor rejection, then broke to new all-time highs. Once that breakout occurred, price consolidated one last time, retested the grey region, then continued an upward trend. I refer to that as a breakout, retest, and continuation move, which is one of my favorite patterns to trend. In this pattern, prior resistance becomes future support! Since the retest of the breakout zone at point F, the Nasdaq-100 has gained +13%.
If we skip to the current price action, we can see almost an identical pattern developing! Price was once again at new all-time highs in mid-February, but then experienced a sharp correction. This decline marked points A and B. Price then proceeded to rally back to those all-time highs, retested the grey region, and was once again rejected (point C)! In that second correction, price bottomed at point D, in which D > B. Since hitting point D, price has rallied back & is currently retesting the grey range once again at point E.
Now, here is where the analysis becomes entirely subjective. I think it’s entirely possible that price is able to continue to rally & breakout of the grey zone for new ATH’s. However, I am also prepared that we are currently retesting a prior resistance level that has been confirmed from two previous retests. As such, it’s very possible price gets rejected from here again, at which point I’ll be looking for signs of a potential upside reversal, particularly at the rising red trend line at the lower-bound. Similar to the consolidation pattern in 2020, a breakout will potentially be subsequently followed by a retest of the previous resistance level, in which that same grey level will attempt to act as support. It may fail, or it may hold as it did on 12/10/2020 (point F).
The point is, I don’t know what will happen but I certainly recognize that price is trading at a critical level where buyers & sellers have previously been willing to transact at lower prices. Because I recognize we’re trading at an important level, I can set my expectations for where we might fall, or what a breakout will look like based on the prior behavior of buyers & sellers under similar circumstances. I’m excited to see how this pattern continues to develop!
Cryptocurrency:
With the continued pressure on the price of Bitcoin, I wanted to share an interesting chart I saw on Glassnode, an on-chain analysis provider, that shows the price of BTC with an overlay of the change in the illiquid supply of BTC.
As we can see from the chart, the price of BTC began to decline dramatically (from around $55k) once the change illiquid supply flipped negative. To learn the details about illiquid supply, I recommend reading this article that was published by Glassnode in December 2020. At a high level, a declining slope in the change in illiquid supply indicates that Bitcoin holders are moving their BTC from their cold-storage wallets to the exchange, such as Coinbase, Gemini, Kraken, etc., in order to potentially be sold. So as the illiquid supply falls, it can potentially indicate that more BTC will be entering the liquid supply to be sold on the market. Simple economics teaches us that as supply increases, with demand remaining consistent, the price of a good/service will fall.
The massive decline the illiquid supply at the end of April 2021 has a cascading decline, showing the force with which holders were ready to sell their BTC. The good news is that the delta in the illiquid supply, while still being negative, now has a positive slope. I’ll continue to keep an eye on this chart to monitor developments & shifts in how bitcoiners are moving their BTC between cold storage wallets & exchanges.
Until tomorrow,
Caleb Franzen