Wild Tuesday In Stocks & Crypto
Cryptocurrencies had a disastrous crash on Tuesday as most were down over 20% and some were down over 40%. The total market capitalization peaked at $830 billion two weeks ago. The latest check is $496 billion which is an over 40% decline. This is great news for the economy and for stocks because the size of the bubble didn’t get large enough for a crash to cause a negative impact. There’s nothing that indicates stocks were hurt by this decline. There will probably be a minor boost in Q4 millennial consumer spending and a minor decline in Q1, but nothing notable. The price of bitcoin has done almost nothing but decline since I said $19,300 might have been the ultimate top. The latest price is $10,400 which means it has fallen over 45%.
The movement in stocks wasn’t nearly as severe as the movement in cryptos, but it was still a wild ride. Stocks initially were up, but then they fell because of the fear of a government shutdown. The Dow had a 283 gain wiped away as it fell 10.33 points. This was the biggest swing since February 10th, 2016. The S&P 500 was down 0.4% and the Russell 2000 was down 1.19%.
Government Shutdown Looms
Congress needs to pass a spending bill by Friday to prevent a government shutdown. The situation is a mess because there are so many different issues in play. The most important issue is probably DACA which is the deferred action for childhood arrivals program. The Democrats want a solution which means some sort of extension while Trump said he’d end it in March. Another issue is one we discussed when the last stopgap budget was passed in December. The defense hawks want the defense spending to increase while Democrats want non-defense and defense spending to increase equally. The other aspects in play are CHIP, which is the children’s health insurance program, and hurricane disaster relief aid. The disaster relief spending was a catalyst for the last continuing resolution to be passed because the situation was dire.
The hope for those wanting the government to keep the lights on is that the Democrats are willing to pass a clean CR which includes CHIP and disaster relief funding, but doesn’t include DACA. The Senate needs 9 Democrats to get on board with the plan if all 51 Republicans support it. Obviously, the addition of 1 Democrat in the Senate this year doesn’t help the cause.
According to the betting market, the chance of a government shutdown starting on January 22nd is 26%. We can use the stock market as a prediction mechanism as well. To me, this selloff means the stock market is more worried about a shutdown than the prediction market. I think we could see stocks selloff everyday until there’s an agreement in place. That might be an excuse to take profits for some investors as the market got overheated last week. The chart below shows the average returns in the VIX, 10 year note, gold, and S&P 500 during the week after government shutdowns. There have been 5 shutdowns since 1987. The VIX rallying and the S&P 500 selling off makes sense. It is surprising to see gold do poorly because gold is supposed to be protection against volatility. On Tuesday, the VIX was up 14.76% to 11.66 as traders were preparing for a potential shutdown.
May Have Been Profit Taking
At one point during the day, the CNN fear and greed index was at 81/100. It settled at 75/100. The market has had a remarkable run, so it’s likely that traders used the chance of a government shutdown to sell stocks. This isn’t great news for the rest of the week, because I don’t anticipate a deal coming easily. Profit taking sounds benign, but it can cause a correction if the government shutdown occurs and some key earnings results aren’t up to snuff. The chart below shows the percentage of S&P 500 companies that are above their 200 day moving average. Since the S&P 500 was at the highest point above the 200 day moving average since 2013, it’s not surprising to see as of Friday about 80% of stocks were trading above their 200 day moving average. With almost every stock having momentum into earnings season, misses could cause big pull backs.
Are We At The Start Of A Bear Market?
When I say we could be at the start of a correction if some of the news events don’t go the in the market’s favor like they have in the past 6 months, that’s a discussion over the potential for a 5% to 10% correction. The table below shows the possibility of another bear market which is at least a 20% decline. As you can see, the signals are broken down by valuations, the yield curve, sentiment, corporate behavior, profitability, and balance sheets/credit markets. Red means a sell signal and orange means half a sell signal. Since the 1990s tech bubble was the biggest equity bubble ever, it’s not shocking to see 17.5 of 18 signals were hit. 13 of 18 signals were hit in 2007 as that crisis was caused by speculation in real estate. 3.5 of 18 have been hit as of January 2018. Even though I have never seen such an organization of data, I’m not surprised to see corporate behavior and profitability not signaling a bear market since profits are accelerating.
Conclusion
The cryptocurrency marketplace is acting more volatile than usual as speculative traders run for the exits. This might not be the final decline, but the fact that prices aren’t exponentially increasing is good news for the economy and risk assets. Some long term investors are using the speculation in cryptocurrencies to justify bearishness, claiming that excess speculation only occurs during times of froth in the market. If the 2017 crypto rally isn’t repeated in 2018, it will give some investors more confidence in stocks.
Recent Comments