Crypto slump halts dip-buying from retail investors
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As tech stocks struggle, retail investors are not rushing to buy the dip in part because their portfolios are being pressured by crypto, with bitcoin nearing its worst monthly performance since 2022.
Why it matters: If these investors are holding out for a crypto recovery to buy the tech dip, that could be a longer wait than they think.
State of play: A crypto fear gauge that tracks volatility and demand plunged to its lowest level since the 2022 meltdown, per CoinGlass, a crypto trading and information platform.
- The index now signals "extreme fear" in a sharp reversal from its reading of 94 out of 100 after President Trump won the 2024 election.
- The CNN fear and greed index, which measures broader sentiment in the market, is also at "extreme fear" levels, even as stocks recovered Friday on hopes of additional interest rate cuts by the Federal Reserve.
What they're saying: The market is always "fixated on something," Steve Sosnick, chief strategist with Interactive Brokers, tells Axios.
- "Right now, that fixation is bitcoin," he says, adding that he knew the tech selloff last week was coming when he saw bitcoin drop below $90,000.
Zoom in: Sosnick sees three factors driving the relationship between crypto and stocks.
- Hardcore crypto retail traders may be overleveraged, so even a 5% move can trigger those liquidations that spill into selling tech stocks.
- Algos are trading a tight correlation between the Nasdaq index and bitcoin, amplifying cross-asset selloffs when one of the two dips.
- At a recent crypto conference, Sosnick says he saw more near-retirees than crypto bros. Unlike the early investors of the "HODL" era, those wealth-builders are more likely to sell when markets get shaky.
By the numbers: Retail dip-buying has slowed amid the crypto slump.
- When the tech sector fell nearly 5% for the week ending Nov. 19, retail activity "significantly slowed, causing the weekly imbalance to plunge 40%," according to JPMorgan.
- Retail volume has been lower throughout November, according to Citi.
- Buying from this group typically picks up in November and December. If the lack of dip buying continues into year end, that could be "an important area to watch," a Citi strategist wrote in a note to clients.
Reality check: Retail investors have continued to buy the dip in Magnificent 7 stocks, although that buying remains below recent levels.
What to watch: The next fixation in the market.
- As stocks rallied Friday on rate cut hopes while Sosnick and I spoke, he wondered if that could be the next topic the market focuses its "roving eye" on.
- "As an investor, I'd rather hitch my star to what a central bank is doing than what a cryptocurrency is doing," he said.
