We talked last month about the risk to stocks represented by the sharp decline in Bitcoin.
As the chart below shows, Bitcoin and S&P futures have traded in a tight relationship in this cycle. And Bitcoin's drawdown has been sharp and deep.
With that, after a 36% peak-to-trough decline in Bitcoin, over about a seven week period, it opened the month of December sitting on this big trendline (the next chart) — technical support.
What's the significance of this trendline?
This explosive bull trend that took Bitcoin almost 5x higher in just two years, was started with the Fed's signaling that the rate hiking cycle was over (which implied an easing cycle was coming).
With that in mind, yesterday the Fed formally ended its quantitative tightening program.
And as we've discussed over the past several weeks, the FOMC Vice Chair, John Williams, has signaled to markets that the Fed would soon expand the balance sheet again (i.e. promote liquidity).
So, as Bitcoin sits on very key technical levels of support, we have this more "pro-liquidity" backdrop working in its favor — and it rallied today, off of trendline support.
Does it mean the decline in Bitcoin is over (for now)? Maybe.
If so, it would diminish one of the risks weighing on stocks in recent weeks.
