Both bitcoin and tech stocks have tumbled – how much worse will it get?
The recent run-up in tech stocks was extraordinary to the point that it defied belief. Now, the bubble looks very much like it is bursting – taking bitcoin with it, too. Dominic Frisby looks at where things might be heading next.
It is all starting to look very dodgy again in stockmarket land.
It is as though we are being sucked back into that dreaded vortex: the US dollar rallies and everything else sells off – stocks especially, but commodities, previous metals and certain currencies too.
It comes, in the UK at least, as positive Covid tests spike, a clampdown on gatherings is announced and the potential of another lockdown looms again.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
There was the feeling that things were slowly starting getting back to some kind of normality, at least in my world. Kids were going back to school and university; people were starting to trickle back into city centres; pubs and restaurants were filling up – even the comedy clubs were starting to open up again.
Stockmarkets – with all their predictive powers – had something else in mind. The extraordinary uptrends that we have seen since March have now been broken, and there is a rush to cash.
Tech, in the form of the Nasdaq, was the leader on the upside. It was impervious to coronavirus, apparently. In fact, Covid-19 was increasing its adoption. But valuations were extraordinary, even by tech’s standards.
Tesla was the poster child: it sextupled. Yes, you read that right. Sextupled. Messages were coming in on WhatsApp about the stock split from people I never knew had an interest in stocks.
My Mrs, I discovered, who has never bought a stock in her life, was long. “I bought it on Revolut”, she told me over dinner. I urged her to sell until she gained a little more experience. A trend is a trend is a trend – it was going up – but trends don’t last forever. Now Tesla leads on the downside. $500 last week. $330 today. It’s lost a third of its value in a week.
We all know that the March to September rally was extraordinary to the point that it defied belief. But we are in this new world of central-bank stimulus and money printing. It’s the new normal. The more markets fall, the more they’ll print. Nevertheless, this does look remarkably like the unwinding of a bubble.
That said, I guess you could have said the same thing back in February to March.
As I sidenote, that other bubblicious asset – bitcoin – has this year been behaving like a tech stock. Here’s the Nasdaq in black, with bitcoin overlaid in red.
But here’s the question we all want to know the answer to: what happens next? Is this the beginning of something bigger, or a temporary blip – a mere aberration?
The volumes and violence of this correction make me inclined to favour the former. I know that the stockmarket and the economy are two very different beasts, but they are related, and the fact that we are in the biggest recession for probably 50 years, maybe even a hundred, inclines me to believe that the fundamentals aren’t totally bullish for stocks.
That said the money printer will go “brrr”, and when it does, inflation manifests itself in the stockmarket.
My strategy will be to follow the trends, using moving averages, as I always do and to try and ignore the noise – even if it is this loud. Short term, the trend is down; longer term it is not.
The S&P is sitting on its nine-week moving average – that’s not abnormal.
How to use the S&P 500 to predict who’ll win the US election
Of course, we also have the US presidential election coming up. Donald Trump can’t stop the S&P falling if it wants to go down, but he can do his utmost to make it go up – and we all know what a good promoter he is.
My new theory on the election is a simple one: 3,400 is the S&P 500’s old high – actually, 3,393 to be precise – set in February before Covid struck. We went briefly above that level in late August – and from that false move we now seem to be getting a fast move in the opposite direction, as the saying (among technical analysts) goes. Currently we sit at 3,330.
My theory on the US presidential election – and the US stockmarket has proved a great barometer of the outcome of second-term elections in the past – is as follows: If the S&P 500 is above 3,400, Trump wins. Below 3,000, Biden wins. If – as is likely – it sits in that 3,000-3,400 range, it’s less clear. The closer it is to 3,400, the more likely it will be Trump – to 3,000, Biden.
So perhaps we make 3,200 the line in the sand.
Here: I’ve made a pretty chart for you.
Let’s see if I’m proved right.
In the meantime, the US dollar index bears watching. If it rallies, we are in no small amount of trouble. Everything else will probably be selling. If it declines, then all will be right in this inflationary world.
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
Dominic Frisby (“mercurially witty” – the Spectator) is as far as we know the world’s only financial writer and comedian. He is the author of the popular newsletter the Flying Frisby and is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. He has also taken several of his shows to the Edinburgh Festival Fringe.
His books are Daylight Robbery - How Tax Changed our Past and Will Shape our Future; Bitcoin: the Future of Money? and Life After the State - Why We Don't Need Government.
Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art.
You can follow him on X @dominicfrisby
‘Inheritance tax insurance’ enquiries are soaring – but is it worth it?
MPs warn over Lifetime ISAs which could leave savers out of pocket
