Bitcoin and sectoral rotation - what could it mean?

Bitcoin price stabilized this week after a strong rally earlier in the day. At the beginning of the year, bitcoin cost less than USD 17000, and today, on Friday, January 27 in the morning, it costs over USD 23000. It seems that bitcoin has returned to a strong correlation with risky assets and ... US technology companies.

Although Bitcoin expressed in US dollars has increased by 37% since the beginning of the year. (the strongest January increase since January 2013) and the Nasdaq 100 by just over 9%, the correlation coefficient for daily data is 0,88, where the correlation is again significant and obviously positive. This relationship is interesting because we can potentially connect it with theory sector rotation for companies depending on where we are in the business cycle.

If we look at what sectors have gained since the beginning of the year on the US stock market, we will see that these are the following sectors: communications, non-essential goods and the technology sector. In the theory of sector rotation, when the stock market hits its bottom, the real economy has yet to hit it. In other words, the market is supposed to discount the future and bounce back when a recession appears in the real economy.

According to this theory, the tech sector is one of those that may be the first to start rebounding just as the world is just worrying about the recession in lagging GDP data. If we look at the aforementioned sectors, such as communication or non-essential goods, we will see that technology companies are in the lead. In communication, Meta and Alphabet have the greatest importance, in non-basic goods it is in the lead Amazon i Tesla, and the clean tech sector is Apple Lossless Audio CODEC (ALAC),, Microsoft and Nvidia.

Bitcoin and sector rotation of companies

By analyzing the behavior Bitcoin from the beginning of the year and adding the theory of sector rotation, the market may be at the beginning of the whole cycle, in which it may begin to discount not a recession but an economic recovery. At least, this may be the result of the current valuations of other sectors as well. Those that theoretically protect against recession in the era of high inflation and did great last year, i.e. the sectors of health care, basic goods and municipal services, are in the red this year.

https://twitter.com/CMCMarkets_PL/status/1618869290832400386

Therefore, if the market correctly evaluates the moment in which the economy is located, then the most undesirable assets in the recent bear market (technology and crypto companies) may return to the favor of investors in the coming months. However, one should also keep in mind that if this happens, it would be a potential bull market starting from all-time high valuations. The bear market that preceded it did not make the indicators more realistic to the extent that it did in the past, and interest rates in the US are coming soon at 5 percent. So will the rebound observed since the beginning of the year continue? Here, hints may appear as early as February 1 during the decision Fed on interest rates.