FG Trading
Bitcoin The rise and fall in prices (BTC-USD) almost from the beginning can be traced back to two factors – changes in the liquidity of the financial system and the desire of investors to own a “decentralized” digital currency as a hedge against printing fiat money. Honestly, without helplessness happy Government spending around the world, I doubt Bitcoin will have a good reason to exist.
Believe it or not, this makes Bitcoin (and other cryptocurrencies as a group) an excellent indicator of future stock market movement, and serves as a great money flow indicator of risk. When you research, Bitcoin has tended to lead the stock market in direction (up and down), to varying degrees over its short history since its invention in January 2009.
Regarding confirmation that the US stock market’s S&P 500 index will rise to all-time highs in May 2024, problems are developing. Bitcoin has already failed to keep pace with stock trading gains since the peak of 2021, and has lagged badly in terms of percentage performance since March of this year. What this might say to investors is that net liquidity has shifted from excessive levels of money circulating in financial markets (which helped push prices above $73,000 in March) to something closer to tightening credit conditions.
It could be a signal of: (1) consumers have spent all their windfall gains from pandemic stimulus in aggregate, (2) persistently high 4% inflation rates are sapping wealth and confidence, and (3) the negative effects of an inverted economy led Treasury yield curve Over 18 months finally pressured bank lending as a whole (measured since October 2022, looking at 3-month securities versus 30-year securities).
Another concern is that the Fed’s 2023-2024 “promises” to lower interest rates may be illusory until a recession brings inflation back to the central bank’s stated target of 2%. Inflation rates appear to have bottomed out in the 3% to 3.5% y/y range during early 2024, as prices of many goods have jumped since March and wage growth remains stubbornly high.
So, if the logical conclusion of trading is that Bitcoin peaks first when system liquidity is at its highest, the lack of a new high in May with the S&P 500 moving at all should leave observers a bit concerned. Looking ahead, Bitcoin’s price “should” fall faster before the S&P 500 is hit hard by selling in the coming months. This trading assumption fits well with the evidence that the economy slowed in April and May. Let’s review Bitcoin’s past patterns to the S&P 500.
StockCharts.com – Bitcoin USD, 12-month daily price and volume changes
Historical business evidence
The main point I want to highlight in this article is that Bitcoin has a history of peaking before the S&P 500, which is represented by SPDR S&P 500 ETF (NYSEARCA: SPY). Unfortunately, it doesn’t have a track record of predicting exact stock market bottoms.
When liquidity conditions are clearly tightened by rising interest rates like in 2018-19 or 2022, owning Bitcoin has been a terrible investment. A cautionary note for Bitcoin bulls is that we don’t have a lot of trading history on what it will do during a severe and prolonged economic downturn, given that its only recession experience was the short-lived 2020 pandemic period.
YCharts – Bitcoin $US, since 2015, recession is shadowed
My statistical analysis for this article begins with a long-term chart comparing the trading action between the two asset classes since June 2017. At this moment, Bitcoin was hitting the mainstream media about strong price gains. The bottom section is my bread and butter focus, where I chart Bitcoin’s price movement “relative to” the S&P 500 Index.
YCharts – Bitcoin vs. S&P 500 ETF, price changes, since June 2017
The overriding issue for Bitcoin bulls is that the US stock market has outperformed cryptocurrencies since May 2021 (the majority of cryptocurrencies rose even less than Bitcoin), three years ago. If you had sold your cryptocurrency positions and traded them into an S&P 500 ETF 36 months ago, you would have more money in your pocket today.
I view this long-term situation as a lack of liquidity confirmation of all-time highs in 2024 in the US stock market. The S&P 500 is certainly higher than it was in late 2021 (with gains led by a handful of big tech companies), but the underlying liquidity in the financial system is more or less the same. Moving short-term bank interest rates from zero to 5%+ over this period has something to do with it.
2018
Perhaps the most interesting and useful thing about today’s conversation is that we can review the monthly changes in Bitcoin against the S&P 500. If we go back to late 2017, the price of Bitcoin rose and then fell throughout 2018. I have marked the red circle, given the currencies Cryptocurrency “advance” investors should be careful in portfolio weighting of stocks. Two months later, the price of the S&P 500 fell 10% over a week.
Once again, during September 2018, the stock market reached all-time highs, unconfirmed by Bitcoin. The -20% bear market continued into late December, bringing Wall Street back to early 2017 price levels.
For reference, between December 2017 and December 2018, Bitcoin collapsed by -85% in price!
YCharts – Bitcoin vs. S&P 500 ETF, price changes, September 2017 to December 2018, author’s reference point
2019-20
Once again, Bitcoin peaked relative to stocks in June 2019 (circled in red). The stock market will continue to rise for another six months, despite severe credit tightening in the financial system including a slight inversion in the Treasury yield curve. Then came the Covid pandemic, with mandatory economic shutdowns that led to a recession. The S&P 500 erased several years of gains over the course of two months, collapsing -30%.
The price of Bitcoin will end up falling by -70% between June 2019 and March 2020!
YCharts – Bitcoin vs. S&P 500 ETF, price changes, April 2019 to April 2020, author’s reference point
2021-22
Pandemic government money printing, debt relief, payroll loans, and direct check bulletins pushed “liquidity” to new recent highs in America during 2021. Both Bitcoin and the S&P 500 welcomed brutal upward moves on bailouts starting with April 2020, and this really accelerated in the first part of 2021. Bitcoin peaked in March of that year (circled in red) on a relative basis (stocks will rise faster after this point), suggesting that liquidity had become excessive. However, the S&P 500 will move in a positive direction for another nine months at the end of the year.
What we learned… Less robust gains in Bitcoin portend trouble ahead for stocks, while the January-October 2022 period is proving to be very challenging for Wall Street. The S&P 500 is down about -25% measured from top to bottom, while Bitcoin has suffered a -75% decline from its nominal peak in November 2021.
YCharts – Bitcoin vs. S&P 500 ETF, price changes, January 2021 to October 2022, author’s reference point
2024 (present)
That’s why investors need to keep an eye on Bitcoin prices in the future, even if you don’t own cryptocurrencies. Bitcoin’s March surge following groundbreaking SEC approvals for ETFs could mark another high mark for cryptocurrencies (circled in red).
If Bitcoin and digital cryptocurrencies succumb to a heavy sell-off in the June-July period, the stock market outlook will deteriorate significantly in the second half of 2024 and early 2025.Sell in May and leave“The calendar timing spell might be very prophetic this year. I think we’ll find out soon enough.”
YCharts – Bitcoin vs. S&P 500 ETF, price changes, 6 months – 2024, author’s reference point
Final thoughts
If you’re bullish on US stocks, you should root for Bitcoin, plain and simple. Given the weakness of the Bitcoin and cryptocurrency market in the near future, it is possible that liquidity in the financial system will move in the opposite direction.
Assuming liquidity dries up, it will be very difficult to make gains in the stock market in my view. Standing near the recent benchmark of 3x price to sales and 5x price to book value for S&P 500 names, with equity valuations quite inflated as a function of 10-year cycle-adjusted earnings (Shiller CAPE ratio), the downside potential is exceptionally large for Wall Street over the remainder of The year 2024. Don’t kid yourself.
Multipl.com – S&P 500, price to trailing sales, since 2001 Multipl.com – S&P 500, Price to Book Value, since 2001 Multipl.com – US stock market, CAPE ratio, since 1870
Various liquidity metrics have been trending in the wrong direction all year. Below is a graph of the performance from Dow Jones Transportation And Utility averagesIn addition to Vanguard Real Estate Corporation (Funk), iShares 20+ Year Treasure Bond ETF (TLT), and Nasdaq Bank Index. As opposed to flashing green when a healthy stock market advance is made by America’s largest companies, lagging performance from these sectors may indicate a contraction in market liquidity and that the economy is in overdrive.
YCharts – S&P 500 ETFs vs. Liquid Sectors, since January 1, 2024
Please do not assume that stocks cannot or will not fall sharply until 2025. If a recession is next, with liquidity rapidly declining in the financial system, the idea of investment “risk” should not be taken lightly. Under this scenario, both the S&P 500 and Bitcoin could move backwards continuously for several months. Liquidity crises do not mix well with extended valuations. Just ask investors in 1929, 1987, 2000 or 2022 how things would have been. The great part of the 2024 investing equation is that we just saw a similar macro trading setup in 2021.
Is a significant price drop guaranteed for both? No, but further Bitcoin declines from $68,000 today will only heighten the argument that there is real trouble coming on Wall Street, perhaps sooner than most are preparing for.
To have some peace of mind, I suggest owning hedges like rising gold/silver bullion, an above-the-line weighting in cash that yields great returns of 5%+ today, and index put options (which are available at the cheapest premiums for downside protection in many years. Now), And even some short positions to offset potential macroeconomic headwinds in your portfolio. I personally carry ProShares Short QQQ ETF (PSQ) and ProShares Short S&P 500 ETF (SH) in my tax deferred accounts as a way to earn a return and protect against stock declines. I’ve talked about the advantages of dual service in the current market setup, PSQ here and SH here.
Thanks for reading. Please consider this article as a first step in your due diligence process. It is recommended to consult with an experienced, registered investment advisor before making any trades.
