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As I thorough in my Searching for Alpha article “The Major Mistake Most Bitcoin Buyers Make” in August 2021, opposite to the belief of numerous buyers at that time, the selling prices of Bitcoin and stocks are commonly positively correlated, whilst the costs of Bitcoin and gold are typically negatively correlated.
I also famous that “Bitcoin and stocks generally have the strongest bull and bear sector moves when they are aligned jointly” and “Bitcoin price tops and bottoms typically guide shares” these kinds of as “the late 2017 Bitcoin best, the late 2018 Bitcoin bottom, the mid-2019 Bitcoin top rated and the March 2020 Bitcoin base”.
Centered on this historical analysis, I offered the pursuing feelings for investing in Bitcoin, gold and shares:
That usually means Bitcoin rates are pushed by the similar bullish and bearish investor psychology and economic traits as stocks are. Therefore, in its place of concentrating on the essential components buyers feel travel gold rates (these kinds of as inflation and uncertainty), good Bitcoin traders really should concentration on the economic and investor psychology traits that push stocks. Similarly, wise stock buyers should really concentrate on Bitcoin traits and psychology.”
I concluded with the adhering to:
Just after falling in excess of 50% from April to July this calendar year, Bitcoin has recovered relatively in the latest months. But it continue to stays about 25% beneath its all-time superior in April, irrespective of major Fed funds development and the best inflation charges in years! The two Bitcoin and inventory buyers really should tread cautiously likely ahead, considering the fact that Bitcoin has seldom fallen that substantially without the need of further draw back in equally Bitcoin and stocks.”
Although Bitcoin and stocks rallied to new highs around the pursuing several months, they each endured considerable bear marketplace declines in 2022. Bitcoin fell nearly 80% and the NASDAQ 100 ETF QQQ fell just about 40% from their late 2021 highs to their 2022 lows. Immediately after rallying strongly this yr, Bitcoin is continue to down about 60% and QQQ is down about 8% from their highs.
Bitcoin Is Breaking Down Once more
The chart underneath shows Bitcoin selling prices in the best clip and QQQ price ranges in the middle clip. The 250-day (a single trading yr) correlation is in the bottom clip. It shows the correlation between Bitcoin and QQQ above the past 12 months has been pretty substantial at .82.
I have drawn blue pattern strains for main rallies given that 2020 and blue circles around durations when costs broke down below those people trend lines, signaling selloffs. As this chart displays, making use of trend lines has been really beneficial in pinpointing the early levels of main weak point for the two Bitcoin and QQQ.
I also positioned eco-friendly vertical traces on main bottoms for Bitcoin and QQQ in March 2020 and January 2023 and crimson vertical lines on main tops in November 2021 and (I imagine) July 2023.
The most up-to-date blue circle for Bitcoin exhibits it has not too long ago damaged down below the uptrend line that has been in place all 12 months. But the blue circle for QQQ exhibits it has not broken below its 2023 uptrend line nonetheless. We feel it will shortly.
Bear Current market Is Not Over
The robust rally in shares this 12 months has led many if not most investors to feel that the bear market place ended in 2022 and a new bull industry has started. I disagree for a wide variety of technical and basic motives.
One crucial complex rationale is that the rally has largely been pushed by a handful of mega-cap Tech shares like NVIDIA, Apple, Microsoft, Google, and so on. A usual indication of a nutritious new bull market place is the popular participation of a majority of shares in the rally, not just a little variety of massive-cap stocks.
But even with the big rally in shares – and the QQQ, in certain – this 12 months, the share of NASDAQ shares that have been investing above their key 200-day shifting averages (“200-dma”) in no way rose above 55% this calendar year. At present, only 32% of NASDAQ stocks are trading previously mentioned their 200-dma. That usually means additional than two-thirds are in bearish downtrends.
This future chart reveals the cumulative amount of New Highs much less New Lows for the NASDAQ Index with its 250-dma (purple line) in the top rated clip and QQQ in the bottom clip. This critical measure of current market breadth has ongoing to fall to new lows, irrespective of the rally this year. As the chart demonstrates, this metric turned up and rallied over its 250-dma at the commencing of the bull markets of 2003 and 2009. Considering that that has not happened still, I feel this is a critical signal that the bear industry that started in 2022 is not in excess of.
A Economic downturn Is Coming
Shares generally fall significantly during recessions. As I a short while ago detailed in my Looking for Alpha short article “4 Good reasons A Extensive Recession Is Most likely To Begin Quickly”, I imagine a recession is coming shortly, if it isn’t really already commenced.
Between quite a few other causes I could cite is the chart below of The Convention Board’s Foremost Financial Index, which has fallen to degrees only witnessed during recessions (below pink economic downturn signal line).
According to Justyna Zabinska-La Monica, Senior Manager of Small business Cycle Indicators at The Meeting Board:
The US LEI-which tracks wherever the financial state is heading-fell for the sixteenth consecutive month in July, signaling the outlook stays very unsure. On the other hand, the coincident index (CEI), which tracks exactly where economic activity stands proper now, has ongoing to grow slowly but inconsistently, with 3 of the previous 6 months not transforming and the relaxation growing. As these types of, the CEI is signaling that we are currently continue to in a favorable development ecosystem. Even so, in July, weak new orders, large desire prices, a dip in consumer perceptions of the outlook for small business conditions, and lowering hours labored in producing fueled the primary indicator’s .4 percent decline. The major index continues to recommend that financial action is probably to decelerate and descend into moderate contraction in the months in advance. The Meeting Board now forecasts a brief and shallow recession in the Q4 2023 to Q1 2024 timespan.”
I disagree with The Meeting Board’s expectations about the coming recession. Even though this index points to a economic downturn, but it does not tell us anything about the duration and severity of the economic downturn. As I talked about in my August 2021 Searching for Alpha article “5 Motives The Following Stock Bear Marketplace And Economic downturn Could Be The Worst Since The 1930s”, I consider there are lots of causes why the coming recession will likely be prolonged and deep.
Investor Complacency Is Sky-Higher Regardless of Challenges Becoming Sky-High
In spite of the current weakness of Bitcoin and most stocks, as effectively as tested foremost financial indicators pointing to a recession, trader complacency is sky-significant. The chart down below displays the CBOE Volatility Index (“VIX”) in the leading clip, which is a helpful measure of investor complacency and dread, together with QQQ in the bottom clip.
Normally, when the VIX is lower, it alerts investors are pretty complacent about dangers, which generally happens in close proximity to inventory marketplace tops. Conversely, when the VIX is substantial, it signals traders are quite fearful, which normally happens in close proximity to inventory market bottoms.
The VIX is currently at a really lower level of 14, which is close to the lows it was at close to the market place peaks in early 2020 and late 2021, as the blue circles show. The VIX reveals that buyers are incredibly complacent, despite the significant risks I have introduced in this and other articles or blog posts.
Considering the fact that price ranges of fiscal assets like Bitcoin and shares are eventually driven by investor psychology of panic and greed, they can do anything they want, especially in the small time period. But with Bitcoin owning broken down below its 2023 pattern line, industry breadth remaining incredibly bearish, primary economic indicators flashing pink and trader complacency sky-substantial, I consider the odds are that Bitcoin and shares, which includes QQQ, will slide to new bear current market lows. Smart buyers must plan appropriately.