Has the crypto bull run begun?

Quick recap: last week

A week ago, the Kvarn Pulse newsletter was written in a fairly cautious mood.

The S&P 500 index had fallen below 7,600 points, which forced us to prepare for the possibility of a more pronounced correction. We noted that within the equity market, it was mainly the large technology companies that looked strong, while outside them the number of stocks in an uptrend had clearly declined. We also pointed out that bitcoin had dropped below the $76,000 level, which meant preparing for a possible correction in the crypto market as well.

Equities make a fresh attempt higher

A week ago, our expectations for the equity market were fairly cautious. Over the past week, however, the picture in equity markets has brightened considerably.

The S&P 500 index turned higher after the Federal Reserve meeting last Wednesday, helped along by a simultaneous turn lower in oil prices. Within a few days, the index climbed back above all of its moving averages.

Despite the strong rally, it is worth keeping in mind that the index is still trading within the “range” that has held for nearly two months.

The rally has been driven largely by a rapid surge in technology stocks. The Nasdaq Composite index rose almost five percent in four days and on Monday edged to new record highs.

Outside the technology sector, the tone of the equity market has so far remained subdued. The SPXT ETF has continued to trend lower, trading clearly below all of its moving averages.

The equal-weighted S&P 500 index has also continued to decline.

The narrowness of the rally is also evident in the fact that only about 30 percent of S&P 500 stocks are trading above their 50-day moving average.

On its own, this would not be a particularly worrying sign. A large share of stocks trading below their 50-day moving average could simply be put down to a deep and broad correction. From that perspective, weak market breadth could even point to a very interesting buying opportunity.

What raises a few more question marks, however, is that fewer than half of S&P 500 stocks are now above their 200-day moving average.

With half of all stocks below their 200-day moving average, it is becoming harder to explain this away as a mere correction.

Market breadth this weak, while the S&P 500 index sits near record highs, is quite unusual. Perhaps the closest precedent dates back to January 2022, when the equity market had peaked shortly before and was turning into a bear market.

We are not yet predicting that the same is happening this time. We are, however, watching the situation with heightened interest. It seems unlikely that such a large divergence between the index and market breadth can persist for long, and we are closely watching which way it will be resolved.

For now, however, the index is pointing upward. The next question is whether the current rally has enough momentum to lift the index to new record highs, i.e. above 7,800 points. At the moment, it is only about one percent away from that level.

So far, conditions for the rally to continue look reasonably good. The VIX index rose slightly on Wednesday but is not yet at levels that warrant particular attention.

In the bond market, by contrast, we saw the MOVE index rise sharply. This is a reason to watch the VIX especially closely over the coming week. If the VIX continues to rise alongside the MOVE index, the outlook for equities could quickly turn considerably riskier.

In summary, the equity market currently presents a fascinatingly split picture. The chart below shows that during September, the performance of the technology sector (XLK) has completely decoupled from the rest of the S&P 500 index (SPXT).

The key question for the coming week, then, is:

Is the technology sector leading the way for the rest of the market, or is it simply the “least bad” option in a weak market, one that a large share of investors are crowding into?

Gold trending lower

Gold has continued to perform modestly in recent weeks. The price is currently below its declining 10- and 20-day moving averages and appears to be testing its rising 50-day moving average.

Just below the 50-day moving average also lies a local low of around $4,240, set around the time of last week’s Federal Reserve meeting.

It will be quite interesting to see what happens near this low. A drop below $4,200 would suggest that the bear market in gold may still have further to run. On the other hand, a rebound from this level would be a very interesting signal. It could mark the first “higher low” since the June lows and offer a rather attractive opportunity to add to positions.

Crypto market on the rise

Perhaps the most significant shift of the past week has been the strong rally in the crypto market. We pay particular attention to the fact that the largest cryptocurrency, bitcoin, has broken above what we consider an important watershed level, $83,000.

This price exceeds the local high seen in May. With that level now taken out, it is hard to maintain any interpretation suggesting that bitcoin is still in a bear market.

So have we entered a new, more sustainable bull market? We certainly cannot know for sure. Right now, however, that appears to be the case.

Last week’s local low of around $75,000 provides a reasonably good invalidation point. A break below this level would make last week’s price action look like a “failed breakout”. There is no sign of that yet, however, so our primary expectation is that we are indeed in a bull market for cryptocurrencies.

We also see reasons for optimism within the crypto market. Altcoins have clearly strengthened relative to bitcoin over the past week. As long as this remains the case, it points to a strong appetite for risk among crypto investors.

This ratio is worth watching over the coming week, however. The ratio of altcoin market cap to bitcoin market cap is approaching levels at which previous “mini alt seasons” have stalled over the past year. It will be quite interesting to see what happens this time.

The financial markets are in a genuinely fascinating place right now.

In equities, we see a strong divergence between the S&P 500 index and market breadth. We appear to be looking at either an excellent buying opportunity or, alternatively, an equity market poised for a larger correction. Meanwhile, cryptocurrencies appear to have just moved more decisively into a bull market. At the same time, US Treasury yields have climbed to their highest levels in nearly 20 years, and oil is still trading above $100 per barrel.

We are seeing several unusual combinations and outright contradictions in market developments. We expect these to settle into a somewhat more coherent pattern in the coming weeks. What that pattern will be, however, remains very unclear, and arguments can be made in both directions.

Wherever the market goes, we will keep following the situation and keep you up to date, so stay tuned!