Market Slice: Risk On, Risk Off

Dice to show risk on trading, stock market


What to expect in this week’s Market Slice:

  • The massive expansion of risk-on assets was led by two asset classes: Cryptocurrencies and tech stocks.
  • Unlike the long-term investors who buy to “hold on for dear life,” spec traders are looking for quick gains based on major changes in market sentiment.
  • How the September selloff has erased all the gains of the summer bear market rally

Note: As you may know, we are now mailing every Monday with our exclusive Concierge service. If you want more frequent market updates along with the latest trading program information, news and reviews, sign up here. It’s free.

Here’s an excerpt from this week’s letter, to give you a taste for what you’ll get when you join this free program:

Economic Outlook

More than ever, it’s clear the stock market is not the economy. Even as we linger in the third quarter of slow/no growth, official opinion is yet to admit we are in a recession. This is a major source of  the market’s false optimism, as excess liquidity remaining from several years of very loose monetary policy continues to seek the best return.

We see no reason to expect the reversal in Fed policy Mr. Market is yearning for. However, with more housing and jobless data due this week, the spotlight could be on policy statements coming for the regional Fed presidents, and Chairman Powell. 

Atlanta Fed president Raphael Bostic told Face the Nation on Sunday that “we are going to do all we can at the Federal Reserve to avoid deep, deep pain,”  words that can hardly be encouraging to anyone still holding out hope for a near-term pivot from the Fed. Nonetheless, this week’s statements will be watched closely for any indications that a policy shift might be forthcoming sooner rather than later.

If you want more of the analysis and insights you get from Market Slice, delivered more frequently, this is the way to get it! Sign up now, and we’ll see you in your Inbox next Monday!


What can we learn from tech stocks and crypto?

One enduring feature of the long bull run, stimulated by a bottomless punchbowl of cheap money, has been the runup in growth assets. This massive expansion of risk-on assets was led by two asset classes: Cryptocurrencies and tech stocks.

Here is a 10-year chart of the NASDAQ index of technology stocks.

Image courtesy of

And this chart shows Bitcoin over the same period:

Chart courtesy of

Both charts show parabolic growth over the years leading up to the start of 2022. And both demonstrate the bear market decline that began in January of this year.

As we pointed out in May, the drop in the stock market since the January top was mirrored in Bitcoin prices. Here’s what we said at the time:

As the tech index rose and fell, Bitcoin tracked it almost exactly. In other words, when traders went “risk off” and traded out of the NASDAQ, they also exited Bitcoin. And when it was risk-on time again, Bitcoin rose along with the tech stocks.

This is clear evidence that Bitcoin is a risk asset, and not a sound long-term investment, at least at this point. This means that the idea of reaping easy profits in cryptos – just because it’s a “hot market” — is bogus, and is being overhyped to extract money from naïve traders.

This was written with Bitcoin at $31,000, roughly 50% off the October ’21 high. Of course, Bitcoin is now below $20,000…and the NASDAQ is down a further 1500 points from where it was then, despite the summer bounce.

The coupling eventually broke down, and NASDAQ fared better than BTC over the course of the summer.

However, the Fall selloff in equities brought these two leading “risk on” assets back into alignment. The chart below shows Bitcoin’s relative out-performance of NASDAQ over the past several weeks, highlighted by a big overnight move early this week.

It was quite interesting to see BTC surge to almost $21,000 overnight Monday, creating a significant gap in price movement. Then, as the market opened on Tuesday, these gains were immediately erased.

What this crazy roller coaster ride indicates is that maybe “someone” expected a major development on Tuesday, which apparently did not materialize. The huge jump in Bitcoin prices correlates with a collapse in the British Pound that neared crash levels on Friday, and continuing erosion in the value of government and corporate bonds.

As these stresses continue to pile up in the markets, along with problems in the real economy, the possibility of something breaking in the global financial system is increasing. Was Monday’s big Bitcoin move a bet on some kind of impending financial collapse?


Speculative Plays and Market Risk

Whale-sized speculative positions, put on when the market is closed, are a common occurrence in the crypto market. Unlike the long-term investors who buy to “hold on for dear life,” these spec traders are looking for quick gains based on major changes in market sentiment.

The same thing happens in tech stocks, where recurring hopes for a Fed pivot have led to “risk on” positions lifting the NASDAQ (and, by extension, the entire market) temporarily. Each time those hopes are disappointed, the markets take another leg down.

In a real sense, these two asset categories represent the aggregate market psychology on steroids. For that reason, among others, smart traders want to watch price movement in BTC and NASDAQ, as well as the gap between them, closely.


What About the Broad Market?

We usually take the S&P 500 as the weathervane for the market as it’s broader than the NASDAQ or the Dow, and because the component companies are large cap firms it tends to represent stronger elements in the real economy.

But what about the Russell 2000, which includes some of the smallest publicly traded companies in the country? 

Much as we saw when we looked at the S&P two weeks ago, the September selloff has erased all the gains of the summer bear market rally. We are now testing the June bottom at 1657, any further move down from here threatens a break to levels not seen since the pandemic recovery in Fall ’20.

Here’s the 3- month chart:

And this is the 3-year. Note the extension of the support line at 1657, which delineates the pandemic crash and recovery, as well as the current level:

As we also mentioned regarding the S&P, while the shorter-term RSI and Stochastics indicate a strongly oversold position – which means a bump could be in the offing – the longer-range indicators are still not deep into oversold territory. This tells us there is probably more room for the RUT to fall before a real bottom is established.

In summary, it still doesn’t look too good for the markets. Overall sentiment is risk-off, inhibiting upward movement in the NDX and BTC, while the economy continues to weaken, hurting the broader stock market. And as we pointed out last week, metals are in the tank, and the ultra-strong dollar is causing dislocations throughout the global financial system. No wonder Morgan Stanley declared this week that “something is about to break.”


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