Nvidia’s huge earnings late Wednesday set the stock market for a strong rebound as the chipmaker appeared to allay fears that the artificial intelligence bubble is about to burst.
Thursday started with a huge rally with the Dow Jones Industrial Average rising 700 points, regaining some ground after an earlier AI-related sell-off. Upbeat results from retail giant Walmart also helped.
But the market suddenly tanked, and the Dow lost 300 points, leaving Wall Street wondering what the hell happened.
Some commentators pointed to continuing concerns about the collapse of AI, while others cited a mixed September jobs report that showed strong payroll gains but a slight rise in the unemployment rate to a four-year high.
Meanwhile, Federal Reserve policymakers appeared increasingly hawkish, putting next month’s rate cut in doubt.
Market veteran Ed Yardeni cited these factors in a note late Thursday along with the sell-off in the world’s leading cryptocurrency.
“We attribute some of today’s stock market selloff to the continued decline in the price of Bitcoin,” he wrote. “There was a strong correlation between it and the price of TQQQ, an ETF that seeks to achieve daily investment results consistent with three times (3x) the daily performance of the Nasdaq-100 Index.”
Yardeni blamed bitcoin’s decline on the GENIUS Act, which passed on July 18, saying the regulatory framework it created for stablecoins eliminated the role of bitcoin transactions in the monetary system.
“Bitcoin’s decline will likely force some investors to sell stocks they own,” he added.
Bitcoin fell more than 30% from its previous highs, suffering its worst decline since 2022. Traders who used leverage to make cryptocurrency bets will need to liquidate their positions in the event of a margin call.
Bitcoin could impact the entire stock market, said Steve Sosnick, chief strategist at Interactive Brokers, noting that it has become a proxy for speculation.
“As a long-time systematic trader, he told me that algorithms work based on the relationship between stocks and Bitcoin.” he wrote in a note on Thursday. “Traders have always sought relationships between asset classes, and there are teams of skilled quantitative analysts who sift through the data, both long-term and short-term, looking for inputs that guide their decisions. We called them ‘leads.’”
Sosnick added that in recent days, Bitcoin has become one of the most reliable potential clients.
Tom Lee, head of research at Fundstrat Global Advisors, linked cryptocurrencies to AI trading in particular, noting that investors with large holdings in AI-related stocks also tend to own bitcoin.
“I think cryptocurrencies and bitcoin and ethereum are in some ways a leading indicator for stocks because of this pullback and now this kind of distressed and poor liquidity.” He told CNBC on Thursday.
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