What the Crypto Crash Could Mean for Tech Stocks

How do stocks and crypto correlate?... Take a look back at 2018... What the crypto crash could mean for tech stocks... How $3 billion in silver went missing... Mailbag: A literal 'sign of the top'...

Was the recent move in cryptos a warning or an opportunity?

This is the question that Ten Stock Trader editor Greg Diamond recently pondered... and it's a fascinating, relevant one to consider today, even if you don't own a single decimal point of bitcoin or any other cryptocurrency.

As Greg wrote earlier this week to his subscribers, this is important because cryptos are part of the "market" discussion almost as much as anything else now. It's why we wrote about the recent crypto crash extensively over the past week or so.

From Greg's weekly market outlook...

Like it or not, cryptos are now a major asset class within global capital markets. Investors buy and sell these just like bonds or stocks. Big funds are investing in them as part of their multibillion-dollar portfolios.

In other words, when you are a technical analyst like Greg, as with anything else – be it a particular sector of stocks, bonds, or commodities, which we touched on yesterday – it pays to understand if relationships exist between asset classes... and what they are, too.

How do stocks and cryptocurrencies correlate?

It's a good question that a lot of investors are asking.

Do prices of stocks and cryptos move in the same direction, generally speaking? If one class goes up or down, does the other do the same? Or do they typically diverge like famous American poet Robert Frost's two roads in a yellow wood?

These are valuable answers worth seeking... for anyone who takes portfolio allocation and risk management seriously, which we hope you do. We know many of you have positions in stocks, of course, and are increasingly adding cryptos into your portfolio.

This information can help you practice sound risk management... make the right portfolio allocations to fit your goals... and alert you to adjustments if some new information presents itself.

With cryptos today, that's where we are...

Bitcoin is only 13 years old, so a lot of 'new' is happening every day...

But price patterns – between the world's most popular crypto and others, and stocks – are developing that you should consider when thinking about your portfolio today...

If history is any indication, the recent bitcoin dip might serve an early warning for the same to happen in the stock market. As we wrote in the May 18 Digest, in bitcoin's relatively brief history...

If anything, so far, crypto highs and lows could be looked at like a leading indicator for major stock market turns – both up and down – in recent years...

According to the Bear Traps Report, bitcoin peaked in late 2017 at around $2,000 a few weeks ahead of a top in equities in January 2018... the crypto then bottomed a few weeks ahead of a December 2018 low in global stocks... and reached a low again just a few days before the COVID-19 panic bottom for stocks in March 2020.

And the pattern continued last month... with bitcoin hitting an all-time high of more than $60,000 just a few weeks before stocks started selling off across the board.

Recently, Greg went deeper on this idea – particularly as it relates to the stocks in the tech-heavy Nasdaq Composite Index. He looked at what happened with the Nasdaq during and after the previous two big sell-offs in cryptos in 2018 and 2020.

Let's first go back to early 2020...

You might remember cryptos sold off along with nearly everything else – stocks, precious metals like gold, commodities, high-interest rate currencies, and more – as COVID-19 made its way to our shores.

As Greg wrote this week, this again happened on a smaller scale around this past May 10 (remember his "inflection point" date)... and stocks fell with cryptos. But as he sees it, an important difference existed between the two occasions. As Greg said...

What happened in 2020 was far different from a few weeks ago. This recent move didn't remind me of 2020. In fact, it reminded me of 2018.

In 2019 and early 2020, bitcoin was just kind of chugging along like everything else. Many investors had put it on the back-burner... mostly remembering its first huge speculative bubble of late 2017 and early 2018.

Back then, bitcoin hit an all-time high of nearly $20,000... and then plunged about 70% two months later. The bitcoin crash we just saw was similar... It fell as much as 40% from its most recent high around $60,000 in mid-April.

In other words, if you're interested in making comparisons between bitcoin and other asset classes – perhaps looking for clues on what it means for stocks – Greg says it's worth looking back to early 2018.

Ah, the good old days... when I only worried about what I would eat for lunch that day while at the office and not contracting a deadly virus from the coworker sitting beside me.

Here's what stocks, particularly the Nasdaq, did in 2018...

"Divergences" matter.

When one asset goes up while the other goes down and vice versa, it usually tells you something. In this case, Greg is looking at the Nasdaq 100 versus bitcoin...

This is a chart of bitcoin in red versus the Nasdaq 100 in blue. First, note the green circle. This is where stocks and bitcoin fell together and bottomed together. It's not a perfect correlation, but darn close.

But then later in the year, around May/June of 2018, we saw a major divergence unfold. The Nasdaq rallied to new highs (blue arrow) into October, while bitcoin could not muster the same energy. It kept declining in a textbook downtrend of lower highs and lower lows (red arrow).

So eventually, the decline in bitcoin was a warning for stocks, but it took months before that came true. If you were concerned about a top happening in stocks based on the crash in bitcoin, you had to wait a while.

Our emphasis added in the final paragraph above.

Today, the setup is "eerily" similar, according to Greg. In this chart, you can see the early stages of the "divergence" – two asset prices moving in opposite directions – happening after the Nasdaq 100's recent May 12 bottom. Take a look...

Once again, the correlation isn't perfect, but very similar... While the Nasdaq 100 didn't crash 70% like bitcoin did, it did drop. And as you can see above, the two markets bottomed very close to each other, with the Nasdaq 100 bottoming out on May 12, and bitcoin five days later on May 19.

If we look back on this chart two years from now, the right edge of the green circle could be drawn where we are right now...

Here's the deal...

Followers of Greg's work will know that for the past two weeks, he has highlighted that a significant bottom was made in the Nasdaq on May 12. Tech stocks have since rallied and held key "support" levels.

Bitcoin has done the same since May 19, basically trading sideways... just like it did post-crash in 2018. The biggest question with cryptos and stocks now is... What happens next?

More from Greg...

The Nasdaq 100 has rallied off of major support and bitcoin, too. The question now is can bitcoin, or perhaps another crypto currency like Ethereum, break the historical precedent of recovering to new all-time highs after such a dramatic crash?

Or will we see history repeat with stocks continuing to rally while cryptos suffer a textbook downtrend (just like 2018) that's ultimately a warning for stocks months down the road?

Anyone who tells you they know these answers for sure is more likely selling you a sack of doorknobs than good advice. Nobody has a crystal ball. But Greg does see a few likely scenarios...

First, he says it's important to note that Ethereum, which crashed along with cryptos last month, has behaved just like the Nasdaq and bitcoin since then...

Ethereum looks like it has bottomed around key technical levels – like its 200-day moving average – and has been rallying, with some more significant swings up and down as of late.

Most people don't remember this, but back in 2018, Ethereum also bottomed much later... then rallied strong that April after the crypto bubble first popped. After that, it traded sideways for all of 2019 and the first part of 2020.

That perhaps tells us something about sentiment in the crypto market today AND stocks. Here's Greg's final thought and the explanation on that point...

Is there a change in leadership within the crypto world? Perhaps, but that's not my focus... My focus is that a major low can be the catalyst or the opportunity for investors that takes this speculative bubble to the next level. It's possible for Ethereum to buck the historical precedent and reverse to new all-time highs, and this can carry stocks higher as well.

The takeaway is that from a big decline, investors are spooked, but the Nasdaq 100 and bitcoin (and Ethereum) have bottomed and are rallying... So as long as support holds, I am very much favoring a breakout in stocks even if bitcoin or most cryptos can't quite climb back to recent highs – just like in 2018.

In the end, it's important to understand and monitor how the major players in crypto are behaving, especially as they relate to stocks. You can learn something about both sides, so to speak, by watching the other.

Think of this comparison as another piece of evidence to add to your bullish or bearish case on the markets today, if you have one...

You're already ahead of most investors just by thinking of this. If the tech-heavy Nasdaq moves higher over the next few months, don't be surprised – even if bitcoin and most other cryptos don't.

Jim Rickards Drops 'Truth Bombs' About Silver

Best-selling author Jim Rickards speaks with our editor-at-large Daniela Cambone about the recent stories surrounding silver inventories and the London Bullion Market Association ("LBMA").

LBMA – the organization that has billed itself as the "global authority on precious metals" – overstated its silver holdings in April, an error which it later rectified. But Rickards said there's a lot more to this story than people think...

(Our colleague and Silver Stock Analyst editor Garrett Goggin also covered this story in his latest monthly issue. Subscribers can check that out right here.)

Click here to watch the interview with Rickards right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.

New 52-week highs (as of 6/2/21): ABB (ABB), Automatic Data Processing (ADP), American Financial (AFG), American Homes 4 Rent (AMH), American Express (AXP), CBRE Group (CBRE), Crown Castle (CCI), Richemont (CFRUY), Colony Capital (CLNY), Western Asset Emerging Markets Debt Fund (EMD), iShares MSCI Emerging Markets ex China Fund (EMXC), Forum Energy Technologies (FET), SPDR Euro STOXX 50 Fund (FEZ), GreenTree Hospitality (GHG), Intuit (INTU), Invitation Homes (INVH), JPMorgan Chase (JPM), Coca-Cola (KO), Cheniere Energy (LNG), Motorola Solutions (MSI), VanEck Vectors Oil Services Fund (OIH), Invesco S&P 500 BuyWrite Fund (PBP), Invesco Dynamic Oil & Gas Services Fund (PXJ), VanEck Vectors Russia Fund (RSX), Suncor Energy (SU), and United States Commodity Index Fund (USCI).

In today's mailbag, more feedback on our colleague Dan Ferris' latest Friday Digest and cryptocurrencies... a note for our editor-at-large Daniela Cambone... and a surefire "sign of the top." What's on your mind? As always, e-mail us at feedback@stansberryresearch.com.

"I have a fair amount of Bitcoin and Ethereum based on a percentage of my total portfolio. It started as a pretty small percentage of my portfolio, I did my best to buy near the bottom of the cycle in early 2019 which proved to be a good decision. I am keeping a big-picture, multi-year view on the crypto markets, as this fits my investment style. I plan to hold until we see a significant cycle high, probably this year or next year, at which point I will sell a good portion of my crypto holdings, and then be very patient about buying the next cycle bottom which could take months or even years to unfold.

"I think Bitcoin will stabilize near or over $1M USD, and so I see the next major bear market in crypto as the last great buying opportunity for life-changing gains. Given the risk to reward, I don't need to risk a massive portion of my portfolio for the chance to make life-changing wealth. I am getting better about seeing the big cycles and buying near the lows, next step is to get better at taking profits near the major highs and then redistributing my gains into sectors near their cycle lows, then rinse and repeat.

"Thank you guys for your perspectives and education on so many investment topics and sectors. I am also long silver and gold juniors as well as Uranium juniors, so you could say I am heavily hedged against fiat devaluation and monetary inflation, as well as the big commodity cycle (and green energy) which seems to be in the early innings still." – Paid-up subscriber Chris G.

"Daniela does a great job searching the shadows for input from the private sector. Having an appreciation for gold in this marketplace should no longer inspire the label of 'goldbug.' It should, however, inspire thoughtful consideration. There is a time and place for nearly everything. In this time, gold may be the only investment or acquirable asset which does make sense.

"Cryptos may or may not be the future. Digital is inevitable. Equities, which have a future, are priced out so far beyond reason that only a reset of mega proportions will make them attractive again. The dollar is losing value faster than real inflation is taxing everything else. Real Estate has recreated another threatening economic mega bubble. Bonds are only ever as good as the enterprise backing them and this government does nothing to inspire trust for anyone actually paying attention.

"Gold and silver make sense. Whether they will 10 years from now remains to be seen, but right now they make sense precisely because nothing else does.

"Real assets are the only items I'll hold at this point. Speculative investing has gone totally nuts due to money printing and giveaways. There has been no real recovery since 2008, just deficit spending to make it appear otherwise.

"The Federal Reserve serves nobody except for the banks they shelter. The Fed is selling out America to enrich themselves as their governors move in and out of both Wall Street and Government. We the people don't matter to them at all. They have zero skin in the game. Their mistakes are our debts (skin) to repay. The game is more crooked than ever before.

"That's how it really is." – Paid-up subscriber John C.

"At the Indianapolis 500 this past weekend, I noticed that the airplane banner advertisements that usually display beer and liquor ads were a little different. Aside from good ol' Bubba Burgers, one banner was for a financial advisor and the other was a banner advertising AMC stock! Could this be one of those signs you've been talking about??" – Paid-up subscriber Jim H.

Corey McLaughlin comment: This is fantastic, Jim. Thanks for sharing, and we hope you had a great time at the race.

And you bet... This is literally a "sign of the top" – for AMC Entertainment (AMC), at least.

If readers haven't heard, shares of the beaten-down movie-theater chain have gotten a second wind from the "meme stock" crowd over the past few weeks.

It's a smaller-scale version of the GameStop (GME) story from earlier this year. Over nine trading days into yesterday, traders bid up AMC shares more than 400%.

But, to your point Jim, yesterday looks like it might have been the very top in this retail frenzy.

Today, AMC shares were down more than 15% after company leadership said it was cashing out thanks to the effort of the crowd, filing this morning to sell 11­ million shares for a quick profit.

If you want more detail on how things got to this point with a left-for-dead stock – again – this recent essay from Berna Barshay at our corporate affiliate Empire Financial Research is a good place to get started.

(On a related note, Berna is launching her first paid newsletter next week... Sign up for her big upcoming event for more details. As anyone who reads her free daily knows, it's likely to be a hit.)

And stay tuned to tomorrow's Digest for much more from Dan on this story...

Dan­ plans to cover it and give his take as only he can. He's excited about it... In fact, he called "dibs" on writing about it via e-mail earlier today.

All the best,

Corey McLaughlin
Baltimore, Maryland
June 3, 2021