Bitcoin: A Leading Stock Market Indicator

Bitcoin is useless as a payment mechanism. It is not a store of value despite such promotion. Tom McClellan found a use.

Other than speculation, what precisely is Bitcoin good for? Tom McClellan at McClellan Financial proposes using Bitcoin as a measure of wild sentiment.

Finally, An Actual Use For Bitcoin by Tom McClellan

Bitcoin was designed as an online medium of exchange, so that customers could use it to pay vendors for goods and services. Its primary use lately has turned into being a speculative trading vehicle. But lengthy transaction times and high fees are starting to take the bloom off of Bitcoin’s rose as a transaction medium, and the price is showing that diminishment of interest.

And as this week’s chart shows, Bitcoin’s price plot also shows us something else: a leading indication of what the DJIA is going to do a couple of months later. In this chart, I have shifted the price plot of Bitcoin forward by 8 weeks (56 calendar days) to reveal how the DJIA is following in Bitcoin’s footsteps.

This chart goes all the way back to the autumn of 2016, when Bitcoin was still trading around $600. The leading indication effect really did not start showing up until around February 2017, when the price was closing in on $1000. That seems to be when the big speculation frenzy in Bitcoin started, and thus when it began modeling the same sort of waxing and waning of interest people have in the stock market.

But there is precedent for using another market’s price behavior to model prices in a different market, especially during a bubble. The dynamics of how human emotions react to a speculative bubble remains largely the same from one bubble to the next, since our brains do not change. Years ago in our McClellan Market Report newsletter, we showed this next chart, illustrating how the 2007-08 commodities bubble strongly resembled the Internet Bubble of 1999-2000.

Throughout the CRB Index’s advance in 2007-08, it closely matched the dance steps seen in the Nasdaq Comp during 1999-2000. And as the CRB Index’s collapse started, it also matched the Nasdaq’s path downward. Eventually that pattern correlation broke up, as happens with all pattern analogs eventually. The point is that the dynamics of humans’ reactions to price bubbles remain the
same from one bubble to the next, and that shows up in the resemblance between the price patterns.

So here in 2018, we have a collapsing Bitcoin bubble, but a still-intact stock market bubble, as evidenced by high valuations, the lack of meaningful drawdowns (dip-buying), and a nearly parabolic price plot. The DJIA’s movements are matching those of Bitcoin 8 weeks prior. Why 8 weeks? That’s a fun question, but not an essential one to answer for us to be able to observe and digest this

My eurodollar COT model says that a major price top for the U.S. stock market is ideally due in early March, as discussed in our latest McClellan Market Report newsletter. But Bitcoin’s chart implies that the corresponding top is due a bit earlier, in February. The real answer may lie somewhere between the two.

Tom McClellan

Editor, The McClellan Market Report

The above from Tom McClellan, via email.

A major stock market top coming in February or March? We will see.

Thanks Tom.

Mike "Mish" Shedlock

@Wrldtrst I did well buying cash flow rental property when it was dirt cheap from 2009-2012 and distressed debt when no one else wanted it. So that kind of fun is what I'm talking about. Also just being to buy assets that make sense.

Exactly @SweetKenny - buying assets with lower multiples. Value is in the day 1 cash flow, not the "hope" it will go higher and can sell to the next "greater fool". Value.

I would put zero stock in trying to match the charts of various bubbles. The horizontal timelines rarely match. There are many bubbles you can choose from, and if you fit it after the fact you can say "ah, that was the one". I'm not convinced the top it 8 weeks away. Check out some of the charts of homebuilders, who tend to lead the market. Examples of ones that appear to have passed the peak include NVR, KBH, LEN and TOL. Some others are hanging on, but the charts look toppy, such as DHI, PHM, MTH, and TMHC. Rising interest rates mean less house for the money, and less homebuyers at a given price.

I feel this is a little like AA meeting for me. "Hi, my name is Mnt Goat and I'm a permabear".

Yes somewhat of a goldbug I would say. You have admitted being wrong on stocks and gold underestimating the power of central bankers to keep stocks elevated and gold down but you certainly are not alone and the music just keeps getting louder!

Mish I just re~read the remark I made about u being a possible contrary indicator and started laughing sounds like something Yogi Berra would say...

MntGoat, I don't see permabears. I see people with an open mind, trying to look at the markets and make sense out of them, not people trying to fight the market. If you fight the market, you never win, but if you can make sense out of it, you can formulate a a basic plan for future investment that will work.

Interesting the 2000 Nasdaq and the 2018 SP are both tech heavy indexes. Ergo commodities?