Interest Rate Cut Cycle and Liquidity Shift: How to Position Risk Assets for the "Roaring Twenties"?

Author: Luca

Compiled by: Tim, PANews

Boom Peak → Decline → Roaring Twenties

Note: The Roaring Twenties refers to the social and cultural developments in Europe and America during the 1920s, particularly in areas such as music and popular culture.

Market outlook for the coming months

First of all, please allow me to introduce my past.

August 5, 2024, September 2024, April 2025, these moments of plummeting prices tested my faith, but I continue to accumulate chips in anticipation of higher prices.

Why? Because I know that this round of bull market will ultimately end with a huge "blow-off top," and this peak will cause everyone to experience FOMO before the actual peak arrives.

My entire analytical framework is built around emotional reversal, meaning a rapid shift from uncertainty and anxiety to extreme excitement.

Cryptocurrency market makers are well-versed in how to leverage retail investors' emotions.

The high volatility brought about by the rise, combined with a bullish narrative, will boost market confidence, expand risk appetite, and ultimately create a frenzy.

I believe this is exactly how market makers will distribute chips in the future weeks and even months by taking advantage of the bull market environment.

A clear example of market makers viewing retail investors as opponents can be traced back to early 2025.

At that time, we tracked liquidity traps through on-chain data and price trends, and many signs indicated that market makers were preparing for a larger market movement.

Although most people believe that this wave of the market has ended, our analysis shows that this is just the beginning.

At that time, I publicly stated that my cash position was the lowest since the bear market low in 2022, as I believed it was an excellent buying opportunity, and the facts proved that to be true.

Then, BTC and the entire market hit bottom. Do you think the liquidity trap and market manipulation should have disappeared?

However, this time the BTC trend reversal is extremely unusual, as the price has not experienced any substantial pullback, but instead surged nearly vertically from the beginning of April to the end of May, heading straight for a historical high.

Along the way, we only saw simple signs of wash trading. The purpose of this market behavior is only one: to make those who sold at the bottom feel FOMO and look for opportunities to re-enter the market.

Every brief pause on the K-line is regarded as a "resistance test."

When the first comprehensive correction finally arrives, most market participants have long been stuck in a bearish mindset, actively seeking evidence.

As expected, the "certainty" message has arrived:

• Geopolitical tensions escalate
• Weak Trends in the Third Quarter
• Similar trends to 2021
• Similar trends to 2023

This has led many people to believe that the market is about to enter a long period of consolidation, prompting them to carry out hedging operations before a new round of peaks hits historic highs.

"Alright, Luca, but what does all this have to do with anything?" you might ask.

Well, I think we need to first understand how we have developed to the current situation in order to understand the upcoming trends. The market has gradually shown its patterns over a long period of time, and everything we have experienced to get to today is the main basis for predicting future directions.

I believe that all these liquidity traps, consolidation phases, and bearish sentiments have played and will continue to play a key role, collectively contributing to and ultimately driving us into a sentiment reversal at the peak of the cycle.

To emphasize again, if the sentiment reversal quickly shifts from uncertainty to full-blown euphoria, then market makers must first create the opposite conditions.

They need to push most people towards bearishness and panic in a low liquidity environment before driving up prices, which ultimately lays the foundation for chip distribution.

Now, what should we expect next?

From a technical perspective, I believe that the most likely scenario for BTC in the coming days is that the price will find a bottom between the highs of November and December 2024, which makes the risk-reward ratio skewed towards buyers in the medium to short term.

According to my strategy, I have gradually reallocated the funds from Bitcoin, along with the funds from overvalued altcoins, to altcoins.

From a narrative and emotional perspective, these are always the factors I like to consider, and this analysis is actually completely reasonable.

It makes the market believe that a significant correction is imminent, and the "weak September" pattern further reinforces this expectation. I anticipate that this narrative will dominate market sentiment in the coming days.

This situation may prompt many traders to hedge or short before the next significant rebound, which is why the current market structure makes so much sense to me and why I remain optimistic about the medium term.

"Alright, Luca, I understand the concept of 'emotional reversal' now; it essentially refers to how price fluctuations trigger emotional polarization and induce reversals, but how does this affect the distribution phase and the cycle top?" you might be wondering.

This is the reason for the emergence of confirmation bias. Investors naturally seek narratives that support their arguments while ignoring contradictory evidence, especially when market fluctuations occur.

This is exactly what we saw from the bears in late June this year, who firmly believe that the market will enter a long-term consolidation phase next, while ignoring two key realities: we are in a post-halving year, and the overall bullish market structure remains intact.

This is where macroeconomic policy comes into play: the end of quantitative tightening, the shift towards interest rate cuts, and the possibility of a soft landing for the economy.

First, if we look at the FedWatch tool on the CME, it currently shows that the probability of a rate cut in September is about 90%.

Looking back at the price trends of the S&P 500 index over the past 30 years, the pattern is very clear: after the last three times the Federal Reserve stopped quantitative tightening and began to cut interest rates, what followed was a recession and a massive market crash.

This pattern has appeared 100% of the time in the past 30 years.

This is because the Federal Reserve never intervenes without reason, whether it is through raising interest rates to curb runaway inflation or lowering interest rates to stimulate a weak economy, the Fed's intervention signifies the same thing: the current economic trend is unsustainable and must change.

This very persuasive chart here is the IWM/SPX ratio.

This shows the performance of small-cap stocks relative to the S&P 500 traditional stocks over the past few years, essentially reflecting the performance of risk assets compared to safer, more mature assets.

Since the Federal Reserve began to taper its quantitative easing policy in 2021, IWM (Russell 2000 Index) has consistently underperformed relative to SPX (S&P 500 Index). I believe there are reasonable reasons for this phenomenon, with two main influencing factors:

Small-cap stocks require low-cost capital:

• Their business model relies on aggressive expansion, which in turn requires low-cost financing. With interest rates remaining high, the cost of capital continues to be expensive, forcing many companies to maintain survival by diluting equity, and the stock price trend is a true reflection of this pressure.

Risk appetite collapse:

• Most small-cap stocks are still in the early stages or unable to sustain profitability. In an environment of high interest rates and uncertainty, investors have been reluctant to take on this risk exposure. They prefer the relative safety offered by large-cap and mega-cap tech stocks.
• This is why small-cap stocks have underperformed the S&P 500 index over the past few years.

But interestingly, I think we are approaching a turning point.

• The Federal Reserve is preparing to exit its quantitative tightening measures and gradually shift back to stimulating the economy.
• If this transformation becomes a reality, it could serve as a macro catalyst to reverse the downward trend in small-cap stocks and genuinely drive funds back into risk assets.

The latest macroeconomic data also supports this environment, as well as the notion of an economic soft landing in the coming weeks and even months.

GDP grew by 3.3% year-on-year, while the first quarter data was revised down. Personal income increased by 0.4% month-on-month, and personal consumption expenditure rose by 0.5% month-on-month.

I think these two numbers are key because they tell us how much "fuel" consumers have left.

Income growth indicates an increase in household income, while expenditure growth tells us how much money is actually flowing into the economy.

I think the current economic balance looks healthy, with income growing and consumers still spending, which supports growth.

What impact does this have on the traditional stock market and the S&P 500 index?

Looking back at the period from October to December 2024, we witnessed a sell-off peak in risk assets, which was followed by intensified distribution behavior that exacerbated the sell-off in early 2025.

I believe we are now preparing for a similar situation, just on a larger scale. The upcoming interest rate cuts, the continuously increasing risk appetite, and the discussions about ending quantitative tightening and adding new liquidity are all continuously driving buying.

In my view, this is not a new beginning of a sustainable upward trend. On the contrary, it seems more like another chip distribution phase, which I expect will ultimately give rise to a larger ultimate top, after which the market will enter a bear market cycle.

That said, I believe there is still upward potential in the medium term.

I believe that in the coming weeks, we will fully enter a risk-on market environment. This is likely to drive FOMO sentiment to its peak, creating the perfect opportunity for market makers to distribute their chips.

It is worth noting that the chip distribution phase often occurs after a period of increased risk appetite, which is usually driven by bullish sentiment. From a medium-term perspective, this dynamic will still support risk assets.

Due to my anticipation of market fluctuations and the recent influx of long-positioners who may get washed out, I have maintained a substantial cash position. Over the past few days, I have been gradually rebuilding my risk positions in preparation for the next round of upward movement.

For me, holding cash means having the decision-making power. When a bearish resonance signal appears, I can reduce short-term downside risk through hedging operations; when opportunities with favorable risk-return profiles arise, I can adjust my investment portfolio in a timely manner.

At the same time, I am also preparing for the other direction of the cycle. As we move deeper into this phase, I plan to gradually shift from risk assets to more defensive areas such as consumer staples, healthcare, and government bonds. Since the market has been chasing growth and momentum, these sectors have underperformed relatively.

Looking ahead, I predict the target range for the S&P 500 index to be around 6500 to 6700 points, after which the market will enter a prolonged distribution phase, and the economy will ultimately fall into recession.

After that, I plan to diversify my portfolio until there is a significant market correction to withstand the bear market.

This will give me the opportunity to re-enter at a lower level and position for the next quantitative easing cycle. In this environment, I believe that stocks and high-risk assets will perform well again.

For BTC, my current basic assumption is that the peak of this cycle will be around $190,000 before the bear market starts.

I also see another bearish scenario where the Bitcoin price peaks near $150,000.

There is also a bullish scenario known as the "super cycle," but I am not considering that for now.

In my opinion, this statement is more likely to occur during the euphoric phase at the top of the market, rather than based on the current reality.

Observe a key GlassNode metric, the Adjusted SOPR (aSOPR), which measures the amount of Bitcoin sold at a profit. I believe it can provide us with valuable insights into the phases of the cycle.

At the previous cycle peak, we typically see multiple spikes in this indicator, which usually signifies a large distribution. However, so far, we have only seen one significant spike.

I think one reason why altcoins perform so well is that this usually happens when Bitcoin is not in a full distribution phase.

The last time we saw aSOPR experience multiple violent fluctuations was in March 2024, during the altcoin boom, when many altcoins reached cycle highs.

I believe that once we see several more surges like this, the risk-reward structure will tilt more towards altcoins, which also indicates that Bitcoin and the entire crypto market are approaching the cycle top.

This will be a key indicator that I will closely monitor.

So, what position does the concept of the "Roaring Twenties" hold in all of this?

I believe the macroeconomic background is crucial. We are heading towards a high inflation environment, and the Federal Reserve is preparing to shift from quantitative tightening to quantitative easing.

This background is astonishingly similar to the 1920s, a decade also characterized by rampant inflation and a surge in productivity driven by the Industrial Revolution.

Today, the driving force is the artificial intelligence revolution.

As an entrepreneur, I can say: artificial intelligence has indeed changed everything.

What used to require a team of dozens of people can now be replaced by just a small group of people who know how to maximize the use of AI.

From a historical perspective, the leap in productivity has driven rapid economic development. When combined with high inflation, cheap credit, and ample liquidity, you can see the full picture.

The next few years will be astonishing for the stock market and other risk assets, but I also believe this will lead to the largest wealth differentiation in history.