Welcome to the mullet market: Steady benchmarks in the front, crypto party in the back

This market is starting to summon the lighthearted take on a mullet haircut: business in the front, party in the back. The headline benchmark stock indexes have been all business, remaining calmly firm in an orderly uptrend, barely laying an errant step for weeks. After a post-election pop that lasted a few days and took its year-to-date gain up to 25 per cent, the S&P 500 has consolidated benignly, pulling back to revisit its pre-election high from October and then bouncing 1.7 per cent last week. All the while, a majority of stocks have been positive contributors and leadership has rotated in a persistent way toward financial and cyclical stocks to position for a resilient economy, broadening earnings growth and possible expansionary policies from a new Trump administration. And then there are the risk-embracing, adrenaline-fueled precincts of the market, starting with Bitcoin and crypto-leveraged equities and extending to reawakened penny stocks, crowded-short situations, leveraged ETFs and the unproven or emerging software names that boomed and busted from early 2021 through much of this year. All have been flying in recent weeks. The biggest sponsor of this party is, inescapably, Bitcoin. Up 40 per cent this month, pressing toward $US100,000, feasting on true-believer aggression and a banquet of supportive headlines about the incoming government blessing the asset class. Every bullish argument for Bitcoin comes down to “More people will soon have more ways to buy more of it”. It’s working, for now. The chart is getting into a piping-hot overbought state, the price hustling to a big round number just as families prepare to give thanks and talk turkey about money-making ideas. Bitcoin seems to feed from the pools of aggressive, mission-believing capital that have helped drive the mega-cap Nasdaq favorites for years. I’ve tracked the interplay between Bitcoin and Nvidia shares for a while. They were in lockstep from mid-2023 into earlier this year, when Nvidia ramped on ever-escalating profit projections. Now it appears a violent catch-up move in Bitcoin, perhaps depriving some energy from Nvidia shares, which last week finished flat as the company printed an earnings beat and strong guidance. The market’s immediate response was simply to allow Nvidia to hold onto the $US2.3 trillion in market value it’s added this year, but not to pile on more. MicroStrategy party The crypto-geared public equities are where the festivities get a bit wild. MicroStrategy has become a levered Bitcoin vehicle, selling billions in shares and convertible debt in order to amass more Bitcoin, a self-reinforcing cycle of enthusiasm and financial engineering that had retail-trader net buying tripling into Wednesday’s peak from days earlier, according to Vanda Research. The firm told told clients last week: “It’s still early days, but with the Trump-Musk combo at the helm of the US economy and with classic meme stocks (e.g., MSTR) rising exponentially, we may need to start paying once again close attention to retail-driven meme stock-squeeze flows.” Veteran technical strategist John Roque of 22V Research noted that shares of MicroStrategy – which crossed above $US100 billion in market value, triple the value of its bitcoin holdings – soared to more than 200 per cent above its 200-day average. He plainly says this “qualifies as a price bubble”. Which of course doesn’t mean it must go down right away, though Thursday’s 32 per cent drop from intraday high to low is a hint of the kind of unstable action that reveals some vulnerability. In case this stock is too tame, there are leveraged ETFs tied solely to MicroStrategy shares, including one that trades under MSTU, whose volumes have more than doubled this month. A Bloomberg report late last week described the fund sponsor scrambling to replicate the promised return through options when its primer brokers hit limits on their willingness to offer the exposure through swaps. Market-wide, the assets in leveraged-long equity ETFs are now at a near-record ratio to assets in short ETFs, the prior high coming at the end of 2021, according to this chart from SentimenTrader. This comes as overall net inflows to stock ETFs has neared multi-year highs on a three-month rolling basis, seen in this chart from Strategas. Important to point out that the prior peak was in early 2021, a full year before that bull market topped, and the S&P 500 is up close to 50 per cent or so since then. Meaning the current pace of new money entering these funds is not as heavy relative to total market value as it was nearly four years ago. The aggressive, not to say reckless, action in the faster-moving vehicles of the market is, in some measure, simply a bull market flexing the usual muscles. With “quality” stocks having led the way higher and grown fully valued for most of the past two years, this “flight from quality” might be expected as at least a mean-reversion reflex following the tension-release of the election. Such froth eventually boils over and makes the footing hazardous, but nothing says that moment is here or even close. Benchmark all business And the fact that the core large-cap benchmarks are still in a pretty tight, controlled advance is a counterpoint to any charges of rampant and dangerous ebullience. Earnings rising, the Federal Reserve in a deliberate rate-trimming mode, real GDP above a 2 per cent pace, credit spreads tame, seasonal tailwinds – it all keeps the burden of proof on the bears for now. None of this speaks to whether the market is on-target with its rosy macro outlook, or whether the S&P at a rich 22-times forward earnings largely reflects it already. Matters for 2025 to address, probably. We do know that Wall Street strategists are revising their formal index targets rapidly higher for next year. Among the firms that have unfurled a 2025 view, a near- 11 per cent gain to 6600 in the S&P 500 is projected. Warren Pies, co-founder of 3Fourteen Research, has plotted these year-end revisions in strategist targets and says if the consensus holds around 6600, “it would be the most bullish end-of-year move from strategists ever.” Not an unhinged forecast in magnitude, though the targets are coming off levels well below the current index level for year-end 2024 and into what’s historically a stingier third year of a bull market. Sentiment is getting pretty happy, if not quite to pervasive extremes, based on most positioning and survey work. And even such extremes often bring no harm to the market into year’s end. But file it away as the turn of the year approaches. And keep tabs on the party in the back. CNBC