Must Buy Dips, Again. Plus, the Crypto Unwind

After six down days in the past seven sessions, we should hardly be surprised that we would see a bounce at some point.  Nor should we be shocked that the buying would take on an exuberant character.  Bear market rallies – and to be certain, major indices are NOWHERE CLOSE to a correction, let alone a bear market – are known to be short, sharp, and ferocious.  FOMO is a huge motivator, even during periods of uncertainty, and few investors want to risk missing a potential turning point.

To be fair, even at their worst this week, equity market indices were only slightly below all-time highs.  At yesterday’s close, the S&P 500 (SPX) was a mere 2.5% below its record close of January 27^th, while the Nasdaq 100 (NDX) was 6.0% off its October 29^th closing high.  Those are mere hiccups in their long-term advances.  Yet it is undeniable that certain key stocks, market sectors, and other popular assets were experiencing significant corrections – or worse. 

Key stocks like Microsoft (MSFT) have fallen precipitously.  MSFT’s closing high of $541.06 was set on October 28^th, more than 27% above yesterday’s $393.67.  Much of that drop came after MSFT’s earnings release after the close on January 28^th, but the stock was already almost 11% off its high of exactly three months prior.  Oracle’s (ORCL) woes are well documented, with that stock trading at less than half the all-time high of $344.21 set on September 10^th.  The software sector overall has gotten truly whacked.  A popular ETF that tracks the sector, which has MSFT and ORCL as its #1 and #3 holdings, was down 32% in just the short year-to-date through yesterday.  We have noted that indices have been buoyed by sectoral rotation – statistics like these make it clear from whence investors have rotated away.

This doesn’t even touch on some of the carnage in theoretically decorrelating assets like gold, silver, and bitcoin.  Gold rallied by as much as 62% in just the past six months, while silver more than tripled during over that timeframe.  However, they famously gave back about one-quarter and one-half of those moves, respectively, in the past few sessions.  Gold, which rallied less, has been able to bounce back more convincingly in recent trading, with that commodity about 4% higher today even as silver languishes.  Maybe not every dip is a buying opportunity all the time.

Of course, some of the most significant carnage has occurred in cryptocurrencies.  Bitcoin is of course the most popular proxy for that set of financial instruments and has actually outperformed many of its peers despite its own precipitous fall.  In recent days I have been asked countless times to explain bitcoin’s huge plunge after a stellar move higher.  Below is a generalized series of the reasons for the moves:

Crypto benefitted from the confluence of several factors:

1. Bitcoin ETFs were listed in January 2024.  Investors who might never have opened a dedicated crypto account could now easily invest via their equity accounts.
2. That added positive money flows into bitcoin and later other cryptocurrencies.
3. Candidate Trump openly embraced crypto, and as he gained electoral momentum, so did crypto.  His election and inauguration took crypto into a higher gear.
4. On the way up, crypto benefitted from its lack of margin restrictions.  While stocks and ETFs are constrained by Reg T and similar rules, various crypto dealers and exchanges were willing to extend very high leverage to their customers who were then able to multiply their gains.
5. Digital asset treasury companies bought huge amounts as crypto rose.  Rational or not, equity investors were willing to pay multiples of book value for stocks in DATs, so companies like Strategy (MSTR, fka “Microstrategy”) and Bitmine Immersion Technologies (BMNR) understandably sold stock at a premium to buy crypto at market value.  It was a smart financial arbitrage from their point of view, but very questionable behavior from the investors who paid significant premia to gain exposure they could have gotten elsewhere at face value.

Then, after hitting a record high of more than $125,000 on October 6^th, things unraveled.  To paraphrase Ernest Hemingway, the decline occurred in two ways: gradually, then suddenly. 

1. Crypto came off its early October highs when the industry experienced a “flash crash” on the afternoon of October 10^th, after equities had closed.  Coins recovered a portion of those losses – bitcoin was still above $110k – but that turned the trend lower.  It was widely believed that many heavily exposed dealers suffered margin-related losses and that industry liquidity became impaired.
2. As the trend shifted, some of the factors that had boosted cryptocurrencies began to work against them
   • As noted above, margin can be terrific on the way up, but really exacerbates losses on the way down.The hoped-for crypto regulation stalled in Congress. As the momentum moved elsewhere, so did some of the equity-focused investors.  Although it was easy to buy crypto exposure via ETFs, it was equally easy to sell those ETFs.
   • The stock market premium on DATs faded, making them less able to buy substantial amounts as the underlying currencies fell.  They would now have to issue stock at book value, which the market may or may not want.  They tried buying more on some of the dips, but they have much less ammunition.  Worse, if word got out that MSTR, BMNR, and the like had become outright sellers, that would create a panic.
   • And now, as we see in various other assets that benefitted from huge positive momentum, such as software stocks and precious metals, a bit of a natural correction turned into a rout.  Momentum works in both directions.

No one can accuse bitcoin enthusiasts of being shy about trying to pick a bottom.  After flirting with the $60,000 level overnight, it is now over $70,000 as I type this around noon.  Meanwhile, SPX is nearly back to Tuesday’s closing level, while NDX is back to its Wednesday close.  And the index moves are not about rotation.  NYSE and Nasdaq advancers are leading decliners by a roughly 4:1 margin, and SPX advancers outpace decliners by 220.  I don’t know if the lifeguard blew the whistle calling everyone back into the water, but many swimmers are assuming it’s all clear for now.