Bitcoin Led Market

Bitcoin is the talk of the town.  Saylor is still pumping bitcoin.  Its probably been the most hyped up thing since Trump got elected, so you know there are a ton of bagholders in it right now. A ton.  That explains why its trading so heavy even with the SPX down less than 5% from all time highs.  Bitcoin has dropped 30% from its all time highs.  It underperformance vs Nasdaq YTD continues.  

BTCUSD vs Nasdaq

When the market is going up, all they do is talk about the big cap stocks that are going up the most. When the market is going down, all they do is talk about the big cap stocks that are going down the most.  Bitcoin has joined the pantheon of the Mag7 stocks in terms of most talked about financial asset.

Now that bitcoin ETFs have gathered a ton of assets under management, it starts to act more like a highly volatile, big cap stock.  It also increases its correlation to the stock market, which was already high to begin with.  Its only gone higher since IBIT came out.  You can put bitcoin in the meme asset bucket along with the meme stocks.  It has no intrinsic value, like the meme stocks.  The reason meme stocks seem to always be overvalued with bad fundamentals is because stocks with reasonable valuations are usually not volatile.  That is the number 1 requirement to become a meme stock.  Volatility.  The number 2 requirement is strong historical performance.  This is necessary because retail investors are great at extrapolating past performance into the future.  So anything that's volatile and performed well over the past 3 to 5 years could become a meme stock/asset.  The most recent members of the meme asset family are gold and silver.  That means that 1. gold and silver will remain volatile until it loses it meme status.  2. gold and silver are likely to underperform a 60/40 stock bond portfolio over the next 5 years.  

The investors that are getting hurt the most right now are retail investors.  Institutions aren't doing great lately, with their overweight to the Mag 7, but they hold relatively little bitcoin, or meme stocks so they are not doing too bad.  Retail investors are the ones that are enamored with bitcoin.  Its retail investors who have the get rich quick mentality, buying bitcoin, ether, crypto treasury stocks, meme stocks, and call options on big cap AI names and their favorite meme assets.  Those have all gotten crushed.  

 

Institutional investors on the other hand have a keep my job mentality, which means being closet indexers, sticking with megacap tech, and holding little cash in a bull market so that they don't underperform.  Cash balances are now down to 1.2% of total assets at mutual funds.  

Here is the latest look at performance of stocks with most call volume vs Russell 3000.  This is a window into how retail investors are performing vs the SPX.  As you can see, its been straight down since the spike higher in October, now down towards the tariff tantrum lows in April.  Easy come, easy go.  Most retail investors are hurting right now.  They are in a similar position to the immediate aftermath of the blowoff top in March 2000.  So they are probably feeling similar to retail investors back in April 2000.  

 

Retail investors are driving this ship.  It is quite the change from post GFC environment, when retail investors were absent, and only institutions were relevant.  Now its institutions that are reacting to the moves caused by retail.  Its the tail wagging the dog.  

You have to put yourself in retail investors' shoes to understand the movements of this market.  As a whole, retail investors like buying dips, and it has worked over the past few years. But they also like selling the rips.  But they don't like selling for a loss.  This makes it likely that the first few dips get bought, as retail deploys the free cash they have left, like they have been during this selloff.  But with dips becoming more frequent, they run out of that dry powder to keep buying the dip.  I don't believe they've completely run out of dry powder, but they are running low on ammo.  

With so much retail underwater and looking to bail out on rallies and at break even, previous support levels, high volume nodes where lots of retail investors were buying the dip, are where they will sell the rips.  Previous dip buying support levels are now sell the rip resistance levels.  Right now around SPX 6690-6720.  

 

Hedge funds have been much less bullish than retail during the April to October rally.  They haven't bought into the bullish story lines about AI.  In this month's selloff, CTAs and discretionary funds have been reducing equity exposure, putting them towards neutral to slightly underweight.  Unlike 2022, it won't be the hedge funds panic selling into the weakness in the next bear market.  They are playing it conservatively this time around.  The next bear market will be led by retail investors selling.

We've seen a dramatic reduction in call volumes relative to puts.  The ISEE index has gone down a lot over the past few weeks.  Put/call ratios are getting towards levels where you see intermediate term lows in a bull market.  If its a bear market, it can get much higher than this.  But the base case is we're in a sideways market that is neither bull or bear.  

 

There has been extremely elevated insider selling activity over the past few months, higher than we've seen over the past 25 years, according to the below data.  This confirms my suspicions that retail is absorbing supply from smart money investors that are selling into the high prices.  

 

All the bearish talk about the Hindenburg Omens in late October/early November were correct.  Its usually not the case that when a lot of investors point out a bearish technical indicator, it actually follows through on the downside.  Hindenburg Omens don't always preclude bear markets, but there were a large cluster of Hindenburg Omens in November 2021, a couple of months before the start of a bear market.  And there was a huge mass of Hindenburg Omen signals that showed up in 1999 and 2000.  The internal divergence signals are carrying some weight this time, meaning that it could be a signal of a more vicious down move in a few months.  

 

It was quite a roller coaster ride last week.  NVDA earnings were a huge fake out, something that your rarely see of that magnitude.  This market is no longer that boring market that you saw from July to October.  There are a lot of weak hands out there and they have been exposed.  However, we've had a tremendously strong rally from the April lows to the October highs, with very little opportunity for dip buyers to buy.  That means that you have a fair number of investors who are looking to buy weakness that they didn't see for most of the past 6 months.  Those dip buyers should provide a floor for the time being.  But with each successive dip, it will get more dangerous to keep going back to that well of buying weakness.  

Bought the dips on Wednesday and Friday.  These are just trading longs which I intend to sell on any rips towards SPX 6700.  Initially, the plan was to play for a bigger move higher, but I would rather play for more choppy conditions and free up capital to buy the dip again if we go right back down.  It was notable that the rally on Friday was concentrated in the Russell 2000, which easily outperformed the Nasdaq and SPX.  The Nasdaq was the weakest of the 3 indices, which is not a good sign for a long term bottom.  Instead of a V bottom, we may get a U bottom this time around.  Based on the high volume selling and opex related weakness, it does appear that Friday was the low of this move, but it wouldn't surprise me if we revisit that support zone soon.  

I continue to believe that its a choppy range bound market, which favors fading moves at the edges of the range.  The bottom end of the range looks to have been set on Friday, around SPX 6530.  The top end of the range looks to be around 6900, set post tariff deal in late October.  That range will provide a rough guide to navigating the remainder of the year.  Its too early and not enough dips have happened to start a bear market.  If we get some more chop for the rest of the year, that could set up a nasty January when traders look forward to what happens in 2026.