Friday, January 21

Shock to crypto daredevils joins the list of scary market omens

A brutal sales brawl that wiped out billions of dollars from nonprofit growth companies, IPO stocks, and SPAC has now caught up with Bitcoin, further emphasizing the risk tolerances and brokerage balances between small-time merchants.

Retail buyers, whose willingness to stand their ground amid the turmoil has helped propel the S&P 500 to a 21% gain in 2021, are healing some of their worst wounds of the year as losses pile up in speculative corners. . An aggressive swing by the Federal Reserve and the omicron variant have erased more than 10% of the market value of cryptocurrencies, $ 50 billion of publicly traded companies, and 14% of a basket of meme stocks.

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While day traders’ resolve has been tested before, it has been years since it happened without open support from central banks, whose shifting tune around inflation sent risk markets spinning last week. Professional speculators have already voted, unloading risks at the fastest rate in 20 months.

Large drops in an asset like Bitcoin have the potential to reduce trust among the largest population of bettors, a concept described as a negative wealth effect. In total, crypto investors have about $ 250 billion less to play with on their accounts than when stocks began to slide on November 26. It’s a troubling backdrop for the market.

“Buying the dip didn’t work out well last week so retailers might be pulling their horns a bit,” said Matt Maley, chief market strategist at Miller Tabak + Co. “Since they’ve been so important to the demand from the supply / demand equation this year, its absence is an unwanted development for the bulls. ”

If Bitcoin, which is trading 24 hours a day, is any indication, the markets will be exposed to more volatility. The cryptocurrency has lost as much as 21% since the trading close on Friday and rocked wildly over the weekend. The decline brought it down to around $ 42,290 at one point, well below its all-time high of near $ 69,000 just a few weeks ago. Meanwhile, open interest in Bitcoin futures is also plummeting and funding rates on some of the major exchanges turned negative, meaning those short are paying a premium – all signs that crypto positions They are on a liquidation frenzy.

Last week’s pullback in stocks and cryptocurrencies provided further evidence that Bitcoin is an imperfect hedge for institutional wallets. While it has an attractive close-to-zero correlation with major asset classes, when stocks have sold 5% or more for a month over the past decade, Bitcoin is down 86% of the time with an average drop of 13%. , Asset Manager Man Group. wrote in a recent note.

“Bitcoin is seen as a key risk on / off asset, so if it stays low, and especially if it continues to decline, it will be a big red warning sign for other risk assets next week,” Maley said.

Matthew Tuttle, CEO of Tuttle Capital Management LLC, agrees. Crypto bulls like to argue that Bitcoin is an inflation hedge, but it really acts as a risk asset, he said.

“A sell-off is not a good thing for stocks, they are related from a risk in / out risk perspective,” he said in an interview. “Which is unfortunate because the stock markets ended Friday on a decent note.” Losses in such a large area are also not good for overall sentiment. ”

Traders’ nerves have been repeatedly shaken over the past week, and superlatives have quickly added, and high-flying speculative companies have taken heavy beatings.

Cathie Wood’s ARK innovation fund lost about 13%, its worst week since February. A Special Purpose Acquisition Vehicle Index, or SPAC, lost about 6% in that period, its worst performance since March. And a VanEck exchange-traded fund that tracks some of the most favorably mentioned companies on the internet lost nearly 9%.

Retailers are even getting annoyed by some big tech names that had previously been market favorites, including Meta Platforms Inc., Facebook’s parent company, which fell nearly 8% over the past week. That far outpaced losses among its megacap technology peers, but was not met with the surge in purchases from retail investors that helped drive the stock out of previous sell-offs.

Stock positioning suffered the steepest weekly decline since the collapse in March 2020 at the start of the pandemic, Deutsche Bank AG strategists led by Parag Thatte wrote in a note on Friday. It went from near the top of its all-time range to around the 50th percentile, the lowest this year, they said.

Doug Ramsey, chief investment officer at the Leuthold Group, says his company’s internal measures on oversold conditions are extreme, down to levels that would be expected to rebound even if stocks were in the middle of a major bear market, not a major bear market. the current bull run. “So if the market cannot recover next week, especially with a very favorable schedule, I would be very concerned,” he said.

© 2021 Bloomberg

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