The Beauty of Divergence
The financial markets are full of relationships, some of them are quite simple but others can be well… complicated.
By far the most fascinating one on the minds of many investors today is Bitcoin and the stock markets. Even the Wall Street Journal weighed in over the weekend with the following headline, which includes opinions from many different analysts.
From what I’ve seen, alternative investors who prefer cryptos are not usually very involved in traditional finance and vice versa. Perhaps, as volumes pick up in the bitcoin futures offered by CBOE and CME we may see a tighter correlation between the two.
However, there still are some striking similarities in the movements, which we’ll explore below.
eToro, Senior Market Analyst
- Job Fueled Rally
- Divergence from Rates
- Bitcoin + Dow Jones (Continued)
Please note: All data, figures & data are valid as of March 12th. All trading carries risk. Only risk capital you can afford to lose.
Everyone was expecting a strong jobs report on Friday, but the actual numbers that came out were extraordinary. The markets flew!!
The expectation was for a bit more than 200,000 jobs added in February, but the actual data showed 313,000 jobs, the highest reading since December of 2014. Not bad for a short month.
Stocks in New York took off at the open and ended up closing with gains of about 1.75%. Though markets in Asia and Europe opened up after the weekend with some sizable gaps up, they do seem to be having trouble carrying the momentum.
Today is a bit light on data releases, though there will be a 10-year bond auction during the US session, the focus is already starting to shift to the inflation data that’s coming out of the States tomorrow morning.
As we mentioned above, the market is full of relationships. One relationship that usually remains quite tight is the USDJPY and the US 10 Year Bond Yields.
We’ve been focusing quite heavily on the 10 Year Yield lately since it was able to give an early indication of the market rout that we saw in early February.
As we can see on the chart below, the USDJPY and the 10 Year tend to mimic each other’s movements, but somehow they’ve decoupled at the beginning of 2018.
This situation is particularly uncomfortable for US stocks traders and for the Bank of Japan, both of whom would prefer these respective lines to be a bit flatter at the moment.
As we saw in the opening letter above, Wall Street is starting to watch Bitcoin as an indicator, so let’s give em a good show.
From what we can see, in the short term Bitcoin and the stock indexes don’t line up much, except for a ten-day period at the beginning of February when they both fell hard together.
In a post titled “Where’s the Money Gone” dated February 6th, we posted the following chart of Bitcoin and the Dow Jones…
However, since that time we’ve seen very little parallel movements on the short-term charts.
As Thomas Lee points out in this exceptional presentation, a divergence between cryptos and stocks is a great thing because investors who hold both can enjoy the best of both worlds and a crash in either market should not affect the other.
What’s more interesting to me though is the tight correlation between the cryptocurrencies themselves.
Last Wednesday, we had news of a bear-whale in the market who apparently still has about 131,000 BTC to sell.
I can see why this would depress the price of Bitcoin as a large supply could enter the market at any moment, but why would this push down prices of the alt-coins with it?
If this young market is to evolve, we will need to see more divergence among the different cryptos.
Wishing you a beautiful week ahead.
This content is provided for information and educational purposes only and should not be considered to be investment advice or recommendation. The outlook presented is a personal opinion of the analyst and does not represent an official position of eToro. Past performance is not an indication of future results. All trading involves risk; only risk capital you are prepared to lose. Cryptocurrencies can widely fluctuate in prices and are not appropriate for all investors. Trading cryptocurrencies is not supervised by any EU regulatory framework.
Senior Market Analyst