Market barometer: why Tom Lee advises equity investors to keep an eye on cryptocurrencies

Analyst Tom Lee of Fundstrat believes that cryptocurrencies are now setting the tone for the U.S. stock market, and their decline could signal further pressure on stocks. Lee recalls that the October collapse of the crypto market led to a record liquidation of positions worth $19 billion. Despite expectations of further declines, he is confident that the bottom is near. According to him, the digital currency market traditionally recovers faster than it falls, and the next reversal could be rapid.

The direction of cryptocurrencies may suggest where the U.S. stock market will go, according to Tom Lee, head of research at analyst firm Fundstrat Global Advisors, CNBC writes.

The day before, on November 20, bitcoin fell to its lowest level since April amid a sell-off of risky assets: investors were fixing profits, and hopes for another Fed rate cut in December weakened. At the time of writing, bitcoin cost about $84,400, losing 8.3%.

U.S. stock indices also ended the previous day's trading with a decline. Technology giants lost morning momentum despite Nvidia's strong quarterly report. According to analysts, the crypto market and shares of companies related to artificial intelligence are moving in the same vein: large investors often hold both.

Lee admits that crypto-assets will fall further, which may increase pressure on the stock market as well. However, he remains optimistic in the long term.

"The crypto market has been in decline since October 10 - that's when the negative shock occurred," he said. On that day, the deterioration in US-China trade relations coincided with a high level of leverage in the derivatives market. Within a day of the collapse, more than 1.6 million traders lost a combined $19.37 billion - the largest liquidation in history, according to CoinGlass.

Lee says the current drawdown reflects difficulties at market makers: in 2022, it took the market eight weeks to recover, but now it's only been six. "Bitcoin and ether in a way act as a leading indicator for equities: liquidity is weakening, positions are collapsing," Lee says.

Since early October, when bitcoin crossed the $126,000 mark, the market has sagged badly; other tokens have also come under pressure - ether is trading below $2900. Nevertheless, Lee is confident that the bottom is near.

"If you look at past corrections, the recovery has always been faster than the fall," he noted. - Energy is building up in the market: there are panic sales and forced sellers, but buyers are waiting. This will be the impetus for the next reversal.

This article was AI-translated and verified by a human editor