The US equity market has been through the wringer in recent weeks. Traders are poring over technical charts looking to find bottom recovery points. That brings the S&P 500 Index to 6,720.32 on Thursday—its lowest point in two weeks. The main index hasn’t dropped in recent memory. Nevertheless, it is still up around 50% on the year, a testament to how volatile but resilient the market is.
With increased volatility, negative performance in the equity markets has investors worried about outflows. This time around the 50-day moving average at 6,665 is a pretty significant line in the sand. Should the price touch the 21-day moving average of 6,748.10, it may trigger a recovery of that risk-on momentum. Traders are anxiously watching for these indicators to get a sense of where the market will head next in this up and down sentiment environment.
Analyzing Market Movements
With uncertainty rocking equity markets, traders are looking to all sorts of technical indicators for clues as to where selling pressures may find their level. This kind of analysis becomes all the more important in a time of great uncertainty, where outside events and investor perception can dramatically sway market forces.
Recent drop in the S&P 500 Index show heightened worries over economic softening. Concerns about whether large bets on artificial intelligence will pay off have fueled this decline. Cumulatively, high stock valuations have made traders nervous about long-term growth potential.
“A suddenly turbulent US equity market has traders studying technical charts for clues on where the latest bout of selling might stall out.” – Bloomberg
The dollar is certainly on the back foot. This drop is compounded by fears surrounding the possible US government shutdown and fallout related to former President Trump. Moreover, labor market data has been misleading at times, adding to these worries and leading investors to doubt the strength of future economic conditions.
The Bitcoin Enigma
Bitcoin, too, went through a recent downturn alongside traditional asset classes, calling to question how correlated bitcoin is with these other asset classes. Analysts have highlighted that correlations between Bitcoin and various asset classes based on monthly returns have shown a nonexistent relationship over the past five years. The picture gets worse when considering its role as a leading indicator for risky assets like large cap tech stocks.
While some strategists consider Bitcoin a valid investment and store of value, other experts have dismissed it as an extremely volatile speculative investment. They make the case that the crypto space has become independent from other traditional safe havens such as gold. Analysts at Richard Bernstein Advisors counter that cryptocurrencies are not the ‘digital gold’ many investors think they are. Rather, they serve a role that is almost the opposite of what is suggested, within the financial ecosystem.
“Beyond its tech [correlation], Bitcoin is yet to prove its supposed kinship with gold, which has recently snapped a record rally as the US-China trade truce eased tensions.” – The Authers at Bloomberg
How the markets perceive Bitcoin and how it comes to be understood by investors is in each moment and ongoing. Others see it as a green light that emboldens market participants to take greater risks. Others are skeptical as to whether it can continue to be a long-term safe haven asset.
“Bitcoin is nowhere close to matching gold as a haven asset.” – Richard Bernstein Advisors (RBA) analysts
Broader Implications for Investors
Given the recent volatility in the US equity and cryptocurrency markets, this is certainly concerning. They signal the increasing alarm over investor confidence and the general health of our economy. Market participants confront a dynamic environment rife with risk and unknowns. Compounding such challenges with prevailing concerns over government effectiveness and inflationary pressures makes the navigation even more complicated.
The consumer-oriented, University of Michigan survey is being watched closely for further signs of evolving consumer sentiment and economic expectations. Investors are watchfully waiting on this data to gauge its effect on market conditions and possible recovery paths.
As Richard Bernstein Advisors highlight, views on crypto largely depend on whether liquidity conditions are favorable or not in financial markets. We all know that most people think of crypto as one big speculative investment. They argue that it is driven by liquidity dynamics, much like other bubble forming assets.
“see crypto as speculative investments driven by financial liquidity — also typically the driving factor in asset bubbles.” – Richard Bernstein Advisors (RBA) analysts