🙃 Why are Bitcoin and Stocks Trading in Opposite Directions?

What’s on the Menu 🍴

Crypto traders & investors are coming out of a 6 month hibernation…

And in the midst of the FTX court testimonies, things are heating up again!

But it’s not all roses and sunshine - Stocks are getting hammered.

Is this a buying opportunity or the start of something ugly?

Let’s go!

• Why are Bitcoin and Stocks Trading in Opposite Directions? 🙃

• Is This A Turning Point for Big Tech? 📱

• Busting the Myth: Why Dividend Stocks Fall Short in Returns ⬇️

• Bitcoin Pop While Stocks Flop ₿

Today’s newsletter is a 5 minute read.

Why are Bitcoin and Stocks
Trading in Opposite Directions? 🙃

For the past couple of months, we’ve been exploring the signs that bitcoin was getting ready to make a massive move…

And this week it happened.

Bitcoin broke a key resistance level at $32k, which has everyone talking about another bull season.

But stocks are crashing…

So why is bitcoin going up while stocks are dumping?

Here’s what we’ve noticed after trading bitcoin for the past 10 years:

1. During bull markets, bitcoin typically takes on a mind of its own and trades uncorrelated to stocks

2. During crashes (or bear markets), both stocks and crypto fall together.

Example 1: Fall 2021 Market Crash

Both bitcoin and stock indices topped out in November of 2021, and bottomed in November 2022.

They were holding onto each other tightly as prices took the elevator down!

Example 2: Bitcoin’s $32k Resistance Break

People are anticipating higher prices thanks to the upcoming bitcoin block rewards having next spring.

And after 6+ months of consolidation, we saw a massive pop in bitcoin’s price as stocks continued selloff.

What does this mean?

Simple - Fresh capital is flowing into bitcoin.

We can speculate about the “reasons” why:

• Bitcoin block reward halving in April, 2024

• Pending spot ETF approval

• Stock-to-flow market cycles

But in the end the charts show us that investors are rushing into hard assets like bitcoin…

And even gold!

In fact, there’s been a close correlation to bitcoin and gold on this latest leg up.

What happens next? We’ll be keeping a close eye on capital flow to see if crypto is back on investors’ risk appetite…

And get ready to chow down on some tokens!

The headwind is still FTX fallout, regulatory scrutiny, and low quality crypto projects failing.

But for now, Bitcoin remains the asset with the best risk-adjusted returns for more than a decade!

Is This A Turning Point for Big Tech? 📱

On Thursday a rare & strange occurrence took place in the stock market: the Nasdaq-100 index underperformed other indices including small cap stocks.

In fact, the tech heavy index was DOWN 1.9% while the Russell-2000 index was UP 0.3%.

We’re far from a new trend being established of course, as the NDX is still up 31% year-to-date while the RTY is down 5%.

But it’s always worth taking note of a possible regime shift in markets.

A lot of investors have been wondering if large cap tech stocks would ever begin to crack.

The “Mega-8” large cap tech stocks (Apple, Amazon, Google, Meta, Microsoft, Netflix, Nvidia, & Tesla) have continued to defy gravity this year while many other stocks faltered.

If we zoom out on a longer term timeframe, the outperformance of the Mega-8 is even more staggering:

However, it’s unlikely that a prevailing trend in financial markets will last forever (just look at interest rates lately!).

So the question on our minds is this: is the Mega-8 group in the midst of a healthy pullback or is this a larger fundamental shift?

We’re leaning more towards the former, and here’s why:

It’s earnings season, and for the most part the Mega-8 companies are delivering solid results.

With 6 of the 8 companies now having reported results, here’s a summary of Q3 numbers and Q4 guidance thus far:

The only company that has missed expectations so far is Tesla, while 5 of the 6 have beat expectations on both revenue and earnings per share.

Q4 guidance however is a slightly different story. Several of the Mega-8 seem to be more cautious & uncertain about how Q4 will pan out.

But overall these have not been terribly bad earnings reports and these companies continue to grow, though perhaps at a slower pace.

After strong runs so far this year, these stocks were due for a cooling off period.

They still remain great businesses with higher margins than most other companies:

Nonetheless, the Nasdaq-100 is approaching the critical 200-day moving average.

It’s possible that momentum selling could create a more significant correction for tech stocks if the critical moving averages are breached.

Frankly, we’d get excited if that happens.

Historically, large tech selloffs have been a great opportunity to deploy capital:

We’re already seeing value emerge elsewhere in the market, but how wonderful would it be if the biggest & best businesses in the world also go on sale?!

Busting the Myth: Why Dividend
Stocks Fall Short in Returns ⬇️

Many investors have been fed the idea that dividend stocks are the best to invest in.

What’s not to like? You get regular income from a corporation that you can re-invest, use to pay your bills, or go on a vacation.

It’s messages like these that seem to solidify this narrative for people:

But there are hidden truths behind the dividend stock debate that a lot of people miss:

✔️ Dividend stocks are likely to underperform growth companies not paying dividends.

It’s simple. Companies that are more focused on growth (like technology companies, for example), provide higher returns vs. more stable companies that are more likely to pay dividends.

The proof is in the pudding. Let’s look at a rather simple example of comparing a Vanguard Technology ETF that holds less dividend paying companies vs. a value focused ETF which holds more dividend stocks.

Clearly, a higher dividend yield does not equate to higher overall returns.

✔️ Dividend stocks are best for investors looking to take on less risk.

The crux of the dividend stock decision really boils down to how much risk you want to take on.

Dividend stocks tend to have more stability in their underlying business and share price. They’re the safer play.

If you have a lot of time on your side to compound, growth stocks are likely to provide higher returns.

So keep your risk tolerance top of mind when making the decision vs. assuming that dividends equal a better investment.

✔️ Dividends that get paid to investors lower the company share price by the amount of that dividend.

A lot of people miss the fact that when a company pays out a cash dividend, that’s less cash on their balance sheet.

The stock price typically adjusts lower to account for the loss of that cash. This is why it’s important to invest in dividend stocks that still expect consistent growth over time.

Dividend paying stocks without continued business growth = stagnant stock price.

✔️ Dividends may cause some tax issues.

If you’re holding your dividend stocks in a taxable brokerage account, there are pros and cons on the tax side.

The pro: Qualified dividends from many public companies are taxed at lower long-term capital gains rates.

The con: Dividends qualify as taxable income, which can complicate certain tax plans. If you’re trying to qualify for certain tax deductions or tax credits, dividends might be affecting your eligibility if you make too much.

Keep in mind that a well-rounded portfolio is likely to carry both growth AND dividend stocks!

Also, a growth stock is capable of paying a dividend (Apple is a good example of this over the years).

Overall, the choice for dividend stocks needs to be more thought out… It’s not as matter of fact as some people make it seem.

Also, the type of account you hold dividend stocks in also can matter greatly to your overall financial plan!

Video of the Day:
“Bitcoin Pops While Stocks Flop!” ₿

This week bitcoin had a massive break through resistance…

But stocks are dumping below support!

So what’s driving the negative correlation?

We cover that and more in this week’s We Talk Money episode.

You’ll learn:

• What’s next for bitcoin after it broke above $30k?

• Why are stocks taking a dive?

• Where are interest rates headed in Q4?

• And we answer your questions!

Food For Thought 🧠

"Markets can remain irrational
longer than you can remain solvent."
- John Maynard Keynes

DISCLAIMER: We are not investment advisors, and this content is for educational purposes only. We don’t offer financial, legal, or tax advice. Nothing we say is a recommendation to buy or sell any assets. Trading and investing are extremely risky, so please be careful and do your own research.