Bottom signals: Correction over?

This is the Kvarn Pulse newsletter – your definitive source for cryptocurrency market intelligence and macroeconomic trend analysis

Week by numbers

Past week has seen a downward trend in the crypto market. The price of the largest cryptocurrency, Bitcoin, fell by about eight percent, while the second-largest cryptocurrency, Ether, dropped by as much as sixteen percent. The total value of the broader crypto market (excluding the largest stablecoins) decreased by approximately eleven percent.

As Bitcoin price held up better than the rest of the crypto market during the downtrend week, Bitcoin dominance increased by about one percent. Meanwhile, as Ether underperformed both Bitcoin and the altcoin market, the ETH/BTC ratio saw a significant nine percent drop.

Among the tokens in the Kvarn X trading service, the few gainers during the decline week were TIA (+3%) and PEPE (+2%). The biggest losers of the week were ONDO (-28%), JASMY (-25%), and RNDR (-21%).

Stock market local bottom?

The main reason for the crypto market’s recent downturn has been the overall shift in investor sentiment to “risk-off” mentality. Factors such as the rapid pace at which the United States has announced, imposed, and withdrawn import tariffs have made investors quite cautious, leading to a reduction in risk exposure.

In our view, the crypto market, in this current “risk-off” environment, is mostly on a passenger seat on the stock market-led ride. Therefore, we believe that crypto traders should pay even closer attention to the stock market right now.

Perhaps the clearest sign of declining risk appetite can been seen in technology stocks. The Nasdaq Composite Index (IXIC), has dropped by about twelve percent over the past few weeks.

The severity of this shift in market sentiment is illustrated by the fact that the Nasdaq Relative Strength Index (RSI) fell at the beginning of this week to a level lower than it was in August, during the so-called "Yenmageddon" sell-off triggered by the Bank of Japan’s interest rate hike.

Among major tech companies, Amazon’s share price has fallen by about twelve percent in a few weeks, Nvidia’s by sixteen percent, and Tesla’s by as much as thirty-two percent.

This sharp decline naturally raises the question of whether the stock market has already become oversold and whether a potential rebound, which could also benefit crypto traders, could be on the horizon.

The first thing to clarify is that there is no clear sign that such a rebound has begun. Both the broad market index S&P 500 and the Nasdaq Composite are still below their falling five-day moving averages.

If we had to sum up the situation in one sentence, we would say that there is no serious indication of a post-selloff rebound yet.

However, if one wishes to speculate further and look for early signs of a possible turnaround, some clues may be found in the Nasdaq-to-S&P 500 ratio.

When we compare the technology-heavy Nasdaq index to the broader S&P 500 index, we see that over the last two days, tech stocks have slightly outperformed the broader market.

An increase in technology stocks relative to the broader index often signals growing risk appetite in the market. In this case, an upward turn in the IXIC/SPX ratio could be an early sign of the bottom forming, even if it is not yet visible in absolute index values.

A counterargument to this speculation is that between February 21 and March 3, technology stocks weakened sharply compared to the broader index. In such cases, a rising Relative Strength Index (RSI) only signals a slowing decline, not yet a full reversal to an uptrend.

Thus, the recent relative strength in technology stocks is still a weak signal, and we would be cautious about making major moves based on it. However, it does offer one of the first glimpses of light in an otherwise brutal market correction and provides the first reasons in weeks to start seriously considering a potential reversal.

For further confirmation of a trend reversal, in addition to monitoring the IXIC/SPX ratio, it would be crucial to see absolute stock index prices start trending upwards. A minimum threshold for making further conclusions would be crossing above the five-day moving averages.

Finally, it is important to remember that even if the stock market begins to show signs of a rebound, in a longer-term perspective, we are still in a clear downtrend that has only recently started. This is evident, for example, in a weekly timeframe analysis.

Since the weekly trend remains downward, our baseline assumption is that any short-term rebounds should be viewed primarily as temporary deviations from the ongoing downtrend. This means that any potential rebound should be monitored closely, and one should be ready to exit quickly and decisively if the trend turns downward again.

What About Cryptos?

So far in this newsletter, we have focused only on the stock market, its downtrend, and the potential for a rebound. But what about the crypto market?

Our baseline assumption is that, in the short term, crypto prices will closely follow stock market movements. At this moment, we do not see any new crypto-specific catalysts that would be strong enough to push the crypto market upward without a tailwinds from the stock market. As long as the stock market does not show signs of upward movement, our expectations for the crypto market remain cautious.

If the stock market were to rebound upward, that would be a positive factor for the crypto market, and we would expect crypto prices to follow suit. However, our expectations for the size of these movements remain somewhat. The crypto market has held up surprisingly well in recent weeks despite the drop in stock prices. This can be observed by comparing Bitcoin’s price to the Nasdaq Composite index.

The flip side of this relative strength is that the crypto market appears to be quite highly valued at the moment. The BTC/IXIC ratio is currently at the same levels as in mid-November, when the crypto market was in an optimistic mood after the U.S. presidential election.

Our assumption is that with relative valuations already this high, the upside potential is somewhat limited. It will be interesting to see whether Bitcoin respects the trendline that has been forming on the daily chart.

In summary, our view is that the stock market appears oversold, but at the same time, the crypto market seems relatively expensive compared to the stock market. These two views essentially cancel each other out, leading us to not expect major moves in the crypto market in the coming week.

If bigger moves were to occur, the most likely scenario would be that the stock market continues to decline, leading to a breakdown in the relatively high crypto valuations compared to stocks. In this case, we could see larger downward movements in the crypto market.

With these thoughts, we leave our readers to monitor the interesting state of the crypto market and the possible formation of a local bottom in the stock market.

We will be back next week with another Kvarn Pulse newsletter, so stay tuned!