‘Big Tech’ Pullback Explains Why Bitcoin Rally Has Paused in Q3

• Bitcoin rally has paused ahead of the “Big Tech” earnings report next week.
• Despite logging a massive growth in the second quarter, a veteran analyst sees Apple, Amazon, Alphabet, Microsoft, Facebook, and Netflix at overbought valuations.
• He expects a minor stock pullback in the Big Tech shares, which makes 18 percent of the US stock market.
• Meanwhile, Bitcoin’s correlation with the US benchmark S&P 500 could expose it to similar downside risks.

Bitcoin and Big Tech do not concern each other historically, but that is about to change during the July’s earnings session.

The benchmark cryptocurrency is moving at a snail-like speed as it remains stuck inside a $300 trading range. The parameters are pretty low for an asset that typically moves wildly on a day-to-day basis. Its impatient daytraders are therefore jumping the ship to seek opportunities in parabolic crypto assets like LINK, XLM, and others.

Bitcoin rangebound between $9,000 and $9,300 for the last two weeks. Source: TradingView.com

Despite blanketed by a long-term bullish narrative that envisions its price at $100,000, Bitcoin is not showing any enthusiasm to make that happen.

The last three months, instead, has seen the cryptocurrency tuning itself to a string of macro narratives, including an escalating COVID pandemic, the central banks’ stimulus policies, and fears of an economic slowdown. That has brought Bitcoin close to acting like a stock market.

And it is, indeed. The cryptocurrency’s short-term correlation with the S&P 500 reached an all-time high last week. Barring few exceptions, it moved hand-in-hand with the US benchmark index, suggesting that its interim market outlook entirely depends on how the US equities will perform.

Bitcoin-SPX 1-month realized correlation reaches an all-time high last week. Source: Skew

That is what brings Bitcoin in the proximity of the Big Tech – a make-believe index of technology stocks belonging to top companies like Apple, Alphabet, Facebook, Netflix, and Amazon.

Largest Piece of Pie

Big Tech shares at a $7 trillion valuation cover 23 percent of the S&P 500. Meanwhile, they are also 40 percent of the Nasdaq Composite index. On the whole, the so-called FAANG stocks are 18 percent of the entire US stock market.

A recent Bank of America survey found that US tech and growth stocks received more positive bets than any other sector during the Q2, be it Bitcoin or the lower-risk US government bonds. As a result, their stock rates hit record highs in recent days as investors treated them as a haven during the coronavirus-induced lockdown.

FAANG stocks rally of 2020. Source: TradingView.com

That explains why a tech-heavy Nasdaq Composite outperformed its benchmark S&P 500.

But it appears the tech party is coming to an end as investors grapple with a rising number of infections in the US, followed by another lockdown. The BofA survey pointed the same after the first US states started reversing their reopening plans in the face of COVID threats.

Tech Bubble Burst and Bitcoin

Jefferies Global Equity Strategist Sean Darby earlier this week switched his position on Big Tech from “modestly bullish” to “modestly bearish.” The analyst said that he sees a minor stock pullback as the S&P 500 and the Nasdaq Composite trades based on an old fractal.

Calling the tech stocks overvalued, Mr. Darby cited the ‘Four Horsemen’ scenario of the 1990s. In it, four stocks – Microsoft, Oracle, Dell, and Cisco Systems – were dominating the stock market, adding that FAANG is “making a similar trajectory as previous bubbles.”

The BofA survey also stated that Big Tech is now the “most overcrowded trade,’ something that is running ahead of its true valuations as investors seek haven against low-yielding bonds. That amounts to a correction – big or small.

That brings attention back to Bitcoin. The cryptocurrency is practically trading cluelessly without a strong narrative. But as the Big Tech slumps during the earnings session next week – just as Netflix plunged on Thursday after releasing its financial results – it will bring the S&P 500 and Nasdaq down in unison.

Bitcoin, like a mute follower, risks falling downwards under the same setup.