What's up, Trader's Edge?
Monday was a rough day for markets. S&P 500 (SPX) dropped more than 1%, the Nasdaq fell 1.2%, the Dow cratered 1.6%, and small caps took it on the chin, down 1.56%.
All in all, a painful session across the board. The headline everyone grabbed onto was the Supreme Court overturning tariffs and the government slapping them right back on.
That was not the headline that mattered. The headlines that mattered were twofold, and both of them should have your full attention heading into the rest of this week.
(To watch Monday's video replay, tap this link.)
The Bitcoin Problem
Bitcoin looks like it is about to completely collapse. Now, Bitcoin is not such a huge market that it is going to cause systemic damage on its own, but near term, it is cross-margined enough against equities and bonds that it will cause some major dislocations. You are going to see some companies go bust. A name like MicroStrategy (MSTR) comes to mind. They own a massive amount of Bitcoin, and Bitcoin dropping to $40,000 when they carry nine billion in debt is going to start causing real issues. Bitcoin is in a bear market, and it is going to stay in that bear market until names like MicroStrategy and Galaxy Digital (GLXY) start failing, people start worrying, and we get some capitulation.
The other piece that was problematic Monday is private credit. We saw names like Blue Owl Capital (OWL) and TPG (TPG) in a spiral lower. That is a real problem. Blue Owl looks the most likely to fall apart in the coming days, but do not sleep on TPG. This could even mean problems for KKR (KKR), which is already down big. There is a "there there," and it is a problem.
A Confused VIX Is a Bear Market
Bonds continue to show real strength. I think we are going to see the 10-year note fall below 4% yield this week. Most importantly, the VIX is sitting at 21 while the market is less than 2% off its highs. The VIX futures term structure is teetering on partial backwardation, which is the market telling you it does not know what the heck is going on. When you see that, things can get worse from here. That is what the market is saying, and I agree with the market. When you look at Bitcoin, you look at credit, that is an impetus to have a bad week.
We have not had an ugly red Monday in quite some time. Mondays have historically been bullish lately, with nice rallies the previous two weeks. Monday broke that pattern, SPX touched the 100-day moving average, and the 200-day is all the way down at 6,500. This thing could get some teeth.
The weakness in Mega Cap continues. Microsoft (MSFT), with its software exposure, is the poster child. Even Alphabet (GOOGL) started the day strong only to give it all away and close down. Similar story with Amazon (AMZN) and Meta Platforms (META). Bitcoin dropping means a lot of that levered money tied to Mag Seven names starts unwinding. There is a chain reaction there that could create some ugliness.
We do have Nvidia (NVDA) earnings this week. The market is currently pricing in about 5.5% movement. Expect that to climb over 6%, but still below the average, and when it has been below average, Nvidia has tended to move less. On the positive side, energy looked okay Monday, industrials were not that bad, and healthcare looked fine. This continues to be a Mag Seven-led sell-off.
In the Dow, IBM (IBM) dropped 13% after Anthropic announced major AI achievements. IBM has been the one to watch. They were light years ahead on AI, fell behind, seemed to catch up, and now IBM is threatening to break below $200 again. Since January 30th, IBM is down about $100, roughly 30%. We are sitting at April lows right now. A break there, the next stop is $200, and at a certain point you have to ask yourself whether IBM starts to become interesting. The answer, at some point, will be yes.
So what do you do? Watch Blue Owl and Bitcoin. Those are the two things that could really take the market down. Keep an eye on bonds through something like iShares 20+ Year Treasury Bond ETF (TLT) or iShares 7-10 Year Treasury Bond ETF (IEF), and watch that VIX. It is screaming confusion, and a confused VIX is a bear market.
Your only option,
Mark Sebastian