This is a weekend update on the stock and crypto market with a focus on the bullish narrative surrounding small caps, as well as the diverging seasonality trends that is bullish for crypto and bearish for stocks. The Fed initiated a 50 bps rate cut, which is a warning sign of economic weakness. However, the financial markets are showing bullish sentiment despite a seasonally bearish Sept. trend. I discuss the key indicators that I’m monitoring to gauge whether we enter a recession, and the implications of a BOJ rate hike in 2024 that could trigger another flash crash.
Small Cap Mania
The Fed pivot is spurring a lot of bullish sentiment towards small cap stocks and cryptocurrencies. The narrative is that we can observe some strong upside for these small cap assets over the next few weeks. In the crypto market some of the most bullish cryptos such as TAO, FET, and SUI have already rallied 100%+. In the stock market there have been large inflows to stocks like GME with speculation that the stock could rally. A lot of investors are flowing their money into small caps, and this volume could help to drive a rally.
The Altcoin market is attempting a bullish breakout here. I think the likely scenario is a false breakout and an opportunity to buy another dip in October. There is the risk of a shakeout in October before the crypto bull run as well.
IWM has flipped $209.46 from resistance into support, and is preparing to trend up higher. I have $233.66 as the next key target, and I think small cap stocks could go on a rally here.
October Seasonality
The stock and crypto markets have diverging seasonality trends in October. Bitcoin and crypto are historically extremely bullish in October with very strong returns in Q4. This bullish Q4 trend provides even higher ROI during the years of the Bitcoin halving, which occurred earlier this year.
In comparison, the month of October is the worst performing month for US stocks during Presidential election years. When we look at S&P 500 seasonality during election years only, over the last 50 years October has been the worst month: 38% win rate and average return of -3.05%. This Presidential election trend suggests U.S. stocks are at risk of downside in October.
Key Recession Indicators
The markets are still showing some bullish momentum despite a historically bearish Sept seasonality trend. These are the
A pattern of liquidity crises is evident from Feb 2008, Sep 2019, and Mar 2023, where the Federal Reserve injected liquidity to stabilize banks under stress. While these interventions provided short-term relief, they often had unintended consequences such as fueling speculation in commodities markets, leading to inflated asset bubbles. After injecting liquidity, the Fed has historically “pulled the rug” by tightening monetary policy or withdrawing liquidity, which can destabilize markets reliant on easy access to funds for speculative bets. It’s important to watch if Powell resumes REPO operations after a rate cut in 2024. Injecting liquidity and then withdrawing it to crash the markets.
Nonfarm payrolls represent the number of jobs created in the U.S. economy, from 2012 through September 2024. Recessions often coincide with periods where job growth turns negative (job losses). The latest data suggests that job growth remains positive even though it’s lower than before, indicating that the U.S. economy hasn’t yet reached the point where a recession is inevitable. While job growth hasn’t turned negative yet, investors remain hopeful for a soft landing. However, if job losses begin to appear then the economic outlook will signal a recession.
A third important factor to consider is when the Bank of Japan hikes interest rates. The BOJ surprised investors by hiking rates on July 30-31, which led to a flash crash across financial markets in early August. There are two more policy meetings in 2024 on Oct. 30 – 31 and Dec. 18 – 19, and the BOJ is likely to hike one more time this year. It is important to monitor whether there is a rate hike in late Oct or mid Dec because this could cause another flash crash in the markets.
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