The funny thing about Bitcoin right now is that people either want to read or hear everything they can about the asset...or they’re sick and tired of everybody talking about it. (The latter group tends to be the ones who have never owned it or ever traded it.) However, whether one has owned Bitcoin or traded it...or not...its action over the next week or more should be quite important for the short-term action in the stock market.
First of all, it’s a good bet that a lot of traders own Bitcoin on margin. No, we’re not saying that most people own it on margin...we’re just saying that a lot of people do. (The reason we say that it’s a “good bet” that a lot of Bitcoin holders are leveraged is because Bitcoin rallied over 280% in just 3 months...at a time when margin debt exploded to new all-time highs.)
Second of all, Bitcoin fell 30% from its highs...to its overnight lows last night...before bounce from a level below $29,000 to one above $31,000. If the overnight action was THE wash-out move, then this morning’s bounce in Bitcoin will keep on truck’n...and we’ll see new all-time highs within the next couple of weeks (maybe even the next couple of days)..........At its low last night, Bitcoin had retraced a Fibonacci 38.2% of its rally from the beginning of October (when the “strong rally” started to become a “parabolic” one). Thus the worst of the decline in Bitcoin just might be behind us.
However, IF this morning’s bounce does not last...and rolls back over at any time over the next week or so...and breaks back below the overnight lows (of $28,817)...it’s going to be “Katie bar the door.” If Bitcoin breaks below those overnight lows, the short-term momentum players will throw-in the towel and the situation should then begin to feed on itself. Due to our belief that a lot of people have leveraged positions in Bitcoin, a decline below the overnight lows will lead to a big increase in margin calls. That, in turn, will create a situation where “forced selling” will take Bitcoin down very, very, very quickly. In fact, we would guess it would be lucky to hold the $25,000 level that we talked about last weekend.
If (repeat, IF) this second scenario plays out, it should definitely have a negative impact the stock market. Those who bought Bitcoin near its highs using leverage...have probably already seen some margin calls. However, if it falls further, it will start to impact more and more leveraged holders of this asset class (who bought it at lower levels than the $40,000 high). As those margin calls create even more “forced selling,” it will cause the decline in Bitcoin to accelerate...and it should mean that the renewed decline will be even quicker than the one we’ve seen this past week.
The problem is that many of these investors won’t be able to meet their margin calls...and when the bids disappear in Bitcoin during a more severe bout of “forced selling”...they’ll have to sell something else. We believe that this “something else” will be stocks (which they also hold on margin).......No, we do not believe it will cause a major bout of “forced selling” in the stock market, but it could/should be enough to have a negative impact on this overbought, over-loved stock market for a little while.
This is only a short-term call...covering the next week or two. We’d also readily admit that there are A LOT of things going on in the world right now, so A LOT of other issues can and will impact the stock market over the next week or two. However, we still do believe that if Bitcoin’s bounce this morning is the beginning of a quick run back to its all-time highs, it should be positive for the stock market. If, however, it rolls back over and sees a more meaningful period of “forced selling” due to margin calls...it should be negative for the stock market on a short-term basis.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.