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Bitcoin and the Golden Cross
The S&P 500 and Bitcoin (BTC) are about to cross over a bullish technical indicator that is simple to follow and frequently sends traders into a tizzy: the golden cross.
When the price of security crosses its 50-day and 200-day simple moving averages (SMAs) on the price chart, this is known as a “golden cross.”
Moving averages are indicators that look at the past. Thus the signal informs us that the market’s recent advances have outpaced its historical increases.
Nevertheless, traders and chart analysts view it as a sign of long-term price increases.
The upcoming crossing on the daily bitcoin and S&P 500 charts was recently mentioned in a newsletter by analysts at Valkyrie as “the winds of change have started to blow with the rising chance of bullish golden crosses shortly.”
According to the charting tool TradingView, Bitcoin will most likely see its first golden cross since September 2021 in the coming week or two.
The S&P 500 averages, meanwhile, seem to be on track to create the golden cross on Thursday.
The simultaneous emergence of the golden cross on Bitcoin and the S&P 500 may spur trend-following cryptocurrency traders to place new bids on the market.
Since early 2020, Bitcoin has developed into a macro asset and moves generally in sync with the S&P 500.
However, traders should be aware that while a golden cross frequently precedes a significant surge in bitcoin, not all golden crosses do.
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Data from TradingView reveals that out of the eight golden crosses that bitcoin has witnessed to date, three, verified in February 2012, October 2015, and May 2020, were accurate and predicted at least a yearlong bull market.
With price increases between 100% and 350%.
Conversely, the cryptocurrency dramatically collapsed into a death cross in the following weeks and months, proving that the golden crosses of July 2014, July 2015, and February 2020 were bull traps.
The death cross, the reverse of the golden cross, denotes a change in the bearish long-term trend.
The prices rose rapidly in the following two months of the other two golden crossings, which formed in April and September 2019, but eventually slipped into a death cross.
The historical statistics for the S&P 500 show a similar pattern. Since 1930, the index has recorded 52 golden crosses.
According to statistics from Dow Jones Market, 71% of the time over that period, equities increased the following year.
The Federal Reserve’s stance, which is getting less hawkish with each passing month, should be considered along with other elements.
Including the golden cross, as it does not seem to be a reliable predictor of bullishness when used alone.
As anticipated, the central bank reduced its rate increase on Wednesday to a modest 25 basis point increase, bringing the benchmark borrowing rate to a new range of 4.5% to 4.75%.
Chairman Jerome Powell recognizes that “inflation has slowed considerably” during the post-meeting news conference while downplaying the likelihood of a tightening-induced economic slowdown, which boosts risk assets.
Analysts at ING predict that the Fed will raise interest rates by another 25 basis points in March before pausing the cycle that shook the financial markets last year.
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You have benefited significantly from owning American equities during the past ten years.
It’s time to get even.
Investors will go through bull and bear markets over the next decade, but they will finish the ride quite close to where they began.
When you hold stocks, you receive profits from both the stock’s appreciation and any dividend payments. The general stock market follows the same reasoning. The current average dividend yield on the American market is 1.7%.
Price growth may be broken down into two components: rising earnings and/or rising price-to-earnings ratios.
The S&P 500 SPX, 1.65% is expected to earn around $200 in 2022. This indicates that the typical stock in this index sells at over 20 times earnings.
Even if that is a prominent figure in a climate with rising interest rates, it is not absurd (the historical average is around 15x). The S&P 500 serves as my stand-in for the American market.
Even though it is far from a perfect proxy, I can still come to a somewhat accurate conclusion because it is simple to get both recent and historical data for this index.
The “E” in the P/E ratio gives me the most anxiety. The “E” can also be considered sales multiplied by profit margin.
I’ll be utilizing information on the whole economy that the US government has been monitoring since 1947 in this case. Gross domestic product (GDP) is the economy’s sales.
Currently, profit margins are 11.5%, a decrease from 12.1%, which was a record high only a few months ago.
Corporate profit margins have been at 7.1% on average during the last 75 years. The average profit margin in the previous 30 years was 8.2%.
In the past, profit margins were among the most mean-reverting financial metrics. They mean-revert since capitalism functions and excess gains are eventually eliminated through competition.
The U.S. economy’s makeup has undoubtedly evolved significantly throughout the years.
Today, the country focuses more on services than manufacturing, with much of the production moving elsewhere.
Profits had an average of 5.3% in the 1980s, 5.7% in the 1990s, and 7.9% in the first ten years of this century.
The market will sell at around 22 times profits if profit margins stabilize at the 10.2% level of the last ten years.
But in the previous ten years, tax cuts, low (near-zero) interest rates, and globalization have all significantly boosted business earnings.
It is improbable that profit margins will stay at their current high levels given what we know.
Due to the most significant U.S. government debt since World War II, corporate tax rates are expected to increase, globalization is in reverse, and interest rates are unpredictable.
If they do, it’s because we’re going through a recession, which is terrible for company margins.
The most significant ratio of corporate debt to GDP will occur if interest rates remain at this level or, even worse, rise.
Things worsen. Debt fuels economic growth when it rises; however, excessive debt chokes off the oxygen of economic expansion.
As a result, it is likely that the U.S. economy will develop at a slower rate during the next ten or twenty years than in the past.
Investors accustomed to generating enormous profits will become discouraged by stock returns and lose interest in them once P/Es stop increasing. P/Es start a protracted, often multi-decade drop for this reason.
Earnings growth is projected to be slower than in the preceding two decades (in real terms, after inflation) due to this drop.
In this setting, the stock market may fluctuate and have brief bull and bad markets, but decades from now, you will still be where you started.
This is why my company continues to use its “active value” investment strategy, which is based on the reliable value investing philosophy:
1. Become an active value investor
2. Increase your margin of safety
3. Don’t fall into the relative valuation trap
4. Don’t time the market
5. Don’t be afraid of cash
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