Bitcoin Soars While Stocks Trade Flat

Major Moves

When I look at a chart of bitcoin, it feels like 2017 again when the cryptocurrency moved from $3,000 to $19,666 in the fourth quarter. At the time, it felt like a classic bubble as investors, fearful of missing out, piled into the digital asset and drove prices ever higher.

Since Investopedia Editor in Chief Caleb Silver last wrote about bitcoin in the Market Sum last Tuesday, the price is up another 50% as investors pile into the virtual currency. I suspect that the recent rally has a lot to do with the announcement from Facebook, Inc. (FB) that it will be entering the world of virtual currencies with "Libra."

Despite the fact that Libra is a long way from being a reality, it has given a boost to crypto-believers, who pushed bitcoin back above $14,000 today. However, I wonder how much of the recent move in bitcoin is related to the parallel shift in favor of safe-haven currencies like the Japanese yen and Swiss franc.

Historically, rising geopolitical risks, such as escalating tensions between the United States and Iran, have given these safe havens a boost, which could be a positive for bitcoin as well. I also suspect that, because interest in bitcoin has been so high in China and Hong Kong, the recent protests and uncertainty have boosted demand significantly.

We have so little historical data for cryptocurrencies to guide our forecasts, so for now, this will be a fascinating chart to watch. From a technical perspective, this trend is so close to a vertical asymptote that projections would be difficult, but the closer it gets to the prior highs, I think investors should beware of a sudden reversal as the traders who were holding when the price collapsed in 2018 start recouping their losses by selling.

S&P 500

The S&P 500's own bullish breakout has continued to stagnate after yesterday's selling. Weakness in small-cap stocks has been persistent over the past week and indicates that the brief new highs in the S&P 500 index do not constitute a valid breakout yet.

President Trump hinted today at a "Plan B" that would entail billions more in tariffs charged to U.S. businesses and importers on Chinese goods if progress is not made in this week's trade talks at the G-20 meeting. Perhaps because there were no additional details behind the threat, investors seemed to brush it off; however, I expect that risk to help motivate sellers if there is any further bad news this week.

On a positive note, the impact of FedEx Corporation's (FDX) slightly better-than-expected earnings announcement yesterday afternoon could help to support transportation stocks. If a rally in transports and shipping stocks materializes, it could help turn sentiment around in July.

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Risk Indicators – Earnings Reactions Can Be Misleading

From a risk perspective, I was disappointed by the Paychex, Inc. (PAYX) report this morning. The stock missed earnings expectations and lowered the outlook for earnings growth over the next fiscal year from the 9.2% analyst average to 8% to 9% for the next fiscal year. The stock was down over 3.5% at today's close.

However, I would argue that this does not look like an alarming leading indicator for the economy or job growth in general. From a technical perspective, Paychex has been forming a long-term bearish divergence with the moving average convergence divergence (MACD) indicator, as you can see in the following chart, which usually indicates that the stock was temporarily overbought. In a situation like this, it doesn't take much to give investors a reason to sell.

Also, growth of 8% to 9% in a stock in the employment sector would still be a very bullish indicator for the economy. Perhaps the rate of growth is slowing, but in absolute terms, these are still the kind of numbers we would expect when the economy is still on solid footing.

When combined with the surprisingly positive earnings announcement from Micron Technology, Inc. (MU), the FedEx and Paychex reports still point to an economic environment that is far from a crisis. In Micron's case, the company upgraded its outlook for the rest of the year, which should help pull tech stocks, especially semiconductors, back into uptrends.

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Bottom Line – Earnings Overshadowed by Trade Talks

Some early quarterly reports will continue to trickle in before the quarterly season really kicks off in July, and what we have seen so far looks fairly good. There have been a few disappointments as growth slows, but even some of the big negative moves in stocks like General Mills, Inc. (GIS) and Paychex are still showing very strong fundamental growth rates.

A fair earnings outlook is good, but it also means there is a lot riding on some success in trade talks with China. Investors should expect to know more as we head into the weekend, which will probably keep the market averages range bound on Thursday.

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