Bitcoin Mania Is Boosting The Stock Market

While stocks continue to make new highs ahead of a busy week for central banks, the latest gains in the Dow and SP 500 have been overshadowed by investors’ obsessive interest in all things crypto. In a week characterized by the launch of bitcoin futures, the latest new highs in the Dow and SPX came with little fanfare. As I’ll explain here, this is actually good news for the stock market’s interim outlook. We’ll also look at a potentially exciting development for the U.S. middle class economic outlook.

Market-moving headlines have few and far between lately ahead of a handful of central bank policy meetings. The Fed is expected to raise the fed funds target range by 25 basis points on Wednesday, while the European Central Bank and the Bank of Japan, both of which meet on Thursday, are expected to leave their key policy rates unchanged.

While there were few market-moving headlines on Monday, tax reform remains a key focus for investors. As the Republicans’ self-imposed deadline of Dec. 22 for a finalized bill approaches, Wall Street remains hopeful for a tax bill which encourages more business spending and investment in 2018. On another front, the CBOE launched bitcoin futures trading on Sunday evening. The one-month futures contract was trading at around $18,545 as of Monday evening.

Equity market volatility remains subdued even as sentiment leans bullish. In the latest AAII investor sentiment poll, 37% of respondents identified as bullish while 34% were bearish. Those are ideal percentages from a bulls’ standpoint since it shows that there is just enough optimism to support higher prices without compromising the integrity of the market’s uptrend and without inviting counter-trend selling. By the same token, bearish sentiment isn’t high enough to catalyze a runaway-type short-covering rally, nor it is low enough to invite contrarian positions in the stock market.

In other words, there is a fairly even balance among the bulls and the bears which should help maintain the low volatility, even-keeled environment. Add to that the bullish seasonal bias and fourth quarter portfolio positioning that always takes place in December and we have all the ingredients for a continuation of the market’s gentle upward drift.

As alluded to above, bitcoin futures commanded much of the investment world’s attention on Monday. Bitcoin has in fact stolen the stock market’s thunder for the last several weeks now. This isn’t entirely a bad thing. By taking the focus away from the equity market’s extraordinarily impressive performance since last November, bitcoin traders are inadvertently helping the stock market to maintain an even keel by preventing a parabolic-type rally or “blow-off.” Without the latest bitcoin obsession, a case could be made that stock prices would be experiencing by now what cryptocurrency prices are doing, namely going parabolic. A graphic testimony of this development can be seen in the chart below, which shows the linear rally in the Bitcoin Investment Trust (OTCQX:GBTC).

Source: www.BigCharts.com

This chart is in linear scale, which admittedly makes the price progression look scarier than it really is. Nonetheless, whether we view the bitcoin price in the linear or the logarithmic scale, the market’s progression has far eclipsed the stock market in percentage terms. In doing so, it has almost certainly relieved the stock market of the frothiness it developed during the September-October runaway rally. It also partly explains why, despite new all-time highs in several major averages, only 37% of individual investors are currently bullish on stocks when that percentage should be far higher.

As of Monday, my trend indicator was still confirming bullish conditions for the immediate-term (1-4 week) outlook. Five of the six major indices I track – the Dow, SPX, NDX, NYA, and MID – were above the 15-day moving average. What’s more, both the Dow and SPX finished at new highs for the second day in a row on Monday. The trend indicator confirms that the near-term outlook is conducive for higher prices despite the lack of market-moving headlines. Stock prices have edged higher “under the radar” so to speak while traders obsess over bitcoin.

Source: www.BigCharts.com

Meanwhile the number of NYSE stocks making new 52-week highs versus lows has been at least 4:1 in the last two sessions, which is still healthy enough to justify the rising trend in the averages. It’s also worth noting that the number of new 52-week lows on the Big Board have been well under 40 lately, which is a sign that internal selling pressure isn’t an immediate threat to the market. Market breadth as defined by the NYSE advance-decline (A-D) line also continues to expand, as does cumulative advance-decline volume. Thus all three basic aspects of the NYSE market “tape” are in a rising trend and are confirming that the bulls have control over the market.

Source: www.StockCharts.com

While we’re still on the subject of sentiment, one of the factors which bode extremely well for the intermediate-term outlook is middle class economic sentiment. The U.S. middle class has seemingly been stuck in neutral for the last few years and by all accounts haven’t been big participants in the stock market recovery since 2009. If the Washington Post is to be believed, most middle class Americans have no exposure at all to the stock market as this article asserts. With that said, a path has been paved for a middle class recovery in 2018. Check out the following graph which supports this view.

Chart created by Clif Droke

The Middle Class Index (NYSE:MCI) show above is a real-time reflection of the spending patterns of middle America as reflected by the lens of publicly traded companies which cater mainly to the middle class. The companies include WalMart, Dollar General, Kroger, McDonalds, Ford, and JC Penny.

As can be seen in the above graph, the MCI traced out a sideways holding pattern during 2014 through most of 2017. Yet in recent weeks the MCI has shown increasing weakness. In the last two weeks, the MCI has actually broken out to a multi-year high and appears to be gaining in strength. The takeaway from this observation is that the middle class is feeling better about its economic prospects and is gradually increasing its spending patterns. At some point, a continued improvement in the MCI will translate into increased participation in the stock market as always occurs when the middle class feels its fortunes improving. Nothing would do more to accelerate the bull market in equities than for the middle class to become more involved.

As we round out 2017, we’re about to enter what looks to be a very propitious 2018. The interim outlook, based on our survey of the leading indicators, supports a bullish outlook both for stocks and the economy. More importantly, rather than being led mainly by the upper class the economy, and perhaps the stock market, is about to receive some much-needed support from the middle class in 2018. Assuming this happens, we’ll probably witness the first cracks in the stock market’s “wall of worry” at some point later in 2018. For now, though, the wall of worry is fully intact as confirmed by the investor sentiment profile previously discussed. This in turn supports a fully invested position in the stock market and an optimistic view of the U.S. economy’s prospects in the months ahead.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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