An Overnight Reversal in Bitcoin Is Slowing Speculative Trading

Stocks did a nice job of shrugging off some early weakness on Wednesday due in part to strong speculative interest in bitcoin and bitcoin-related stocks. Action in other areas of the market had narrowed primarily due to concerns about overbought technical conditions. Many stocks needed a rest, and the choppy action helped to accomplish that task.

Here on Thursday morning bitcoin reversed from its recent highs, causing some dips in related names that were red-hot after the close on Wednesday. The after-hours chasing in the sector is similar to what happened last week in a cannabis sector that reversed very sharply after social media went into a frenzy over stocks such as Tilray (TLRY) and Aphria (APHA) . Ironically the cannabis names are seeing a little positive action this morning following some earnings.

Part of the negativity this morning is due to coming congressional hearings dealing with Robinhood and the crazy short squeeze that occurred in late January. There is some concern in social media that these hearings may lead to restrictions on aggressive trading by small traders. While nothing is likely to occur soon, there will be continued scrutiny of this aggressive small-cap trading driving the market lately.

The pattern on soft market action lately is that there is some rotational action, then the stock-picking action regroups and a new group of stocks benefits from speculative momentum. This is a function of the high level of liquidity. Money keeps looking for a place to go, and when one group dips, another one takes its place.

This rolling corrective action is healthy, although it is disconcerting when it shifts quickly and momentum reverses overnight, but that is the nature of trading at times.

Bitcoin will likely find some support fairly fast. Although there is very little stock market exposure related to bitcoin, it is an important group because of its impact on the market’s mood. When bitcoin is performing well, it promotes more speculative trading in small-cap stocks.

I will continue to stay focus on stock picking and will be looking for the next hot theme.