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Equities tumbled on October 10, with the Dow Jones Industrial Average losing 879 points, shortly after President Trump threatened 100% tariffs on Chinese goods. Trump’s action was in response to Beijing imposing controls on the export of rare earth minerals and the tit-for-tat between these two world powers made investors fear the start of a real trade war. Gold and silver also soared to new heights, igniting debates on whether these were bearish safe haven trades. But while most investors were talking about equities, gold, and silver, it may be chaos in the cryptocurrency markets that proves to be the important event of the weekend.
Bitcoin plummeted from $123,000 to $107,000 between midday Friday and early Saturday morning and the reverberations were felt throughout the cryptocurrency world. According to Yahoo Finance, as falling prices forced leveraged positions to unwind on a variety of exchanges, the crypto market saw its largest liquidation wave on record. Roughly $19 billion of crypto positions were liquidated in 24 hours. Some say this is good news since it unwound the leverage in the crypto market; however, the craziness may not be over. Crypto Economy (*www.crypto-economy.com) writes that a famous trader opened a massive $163 million Bitcoin short position on the Hyperliquid platform on Sunday, October 12. This trader, known as the “insider whale”, became famous for making $192 million by shorting Bitcoin before the 2022 crypto market collapse. This “insider whale” position, which has 10x leverage (a fairly commonplace leverage ratio in the crypto world), also has a liquidation level set at $125,500. Bitcoin (BTC=) is currently trading at $113,242.09.
We are not experts in cryptocurrency, but money is fungible, and leverage in one area of the financial arena can affect other markets. And while leverage in crypto currency is wreaking havoc in that market, the leverage in the equity market is growing as well. Margin debt is only one form of leverage, however, in September, margin debt rose to $1.126 trillion, a 6.3% increase for the month and this compares to a 3.4% increase in the Wilshire 5000 index. We compare monthly increases in margin debt to the Wilshire 5000 or market capitalization since large increases in margin versus small increases in equity prices is a pattern that has preceded some market peaks. (It suggests more leverage is moving equity prices less.) Margin debt is now 1.69% of total market capitalization, not a huge percentage, but the highest since May 2022. See page 3.
Another form of leverage is the growth and widespread use of ETFs. In the US, ETF industry assets reached a record $12.70 trillion at the end of September, surpassing the previous high of $12.19 trillion set in August 2025. This level may seem small compared to total equity market capitalization of $66.5 trillion as of September, but the ETF universe has grown from modest beginnings to 18% of market capitalization and it is worth monitoring. ETFs are a growth segment of the market and represent significant leverage.
Leverage and late-stage bubbles tend to go hand in hand. However, we do not believe equities are in a late-stage bubble. History shows that bubbles are often a ten-year process, and we are only several years into the AI revolution. Equally important, we expect corporate earnings will continue to surprise to the upside – and that is the opposite of a late-stage bubble characteristic. Nevertheless, it is important to monitor all risk factors.
Given the current debate about the equity market being in a bubble, it is worth looking at historical annual performance. Major peaks such as those seen in 1972 or 2000 were followed by several years of negative equity performance, i.e., multi-year bear markets. Note that there were 27 years between these major peaks, which in stock market terms suggests a new generation of investors drove the advance. This is another characteristic of a bubble. If one counts 27 years from the 2000 peak, it suggests a major equity peak may appear in 2027. In addition, annual equity performance shows that there tends to be a pattern of less significant lows roughly every four years. The last negative year was in 2022, suggesting a low (but not necessarily a bear market low) could appear in 2026. All in all, history tends to repeat but is not precise. In our view, it would not be a surprise to see a correction of 10% or more in 2026, but if equities are indeed forming a bubble, we think it is still in the early stage of one. See page 4.
Seasonality has not been a good guide for equity performance this year, but yearend seasonality tends to be the strongest and most reliable. September tends to be a weak month for equities and October tends to be volatile, but a significant low often appears in October. A low in October is followed by November, December, and January, which have been among the three best performing months of the year historically. And since we believe analysts are still too pessimistic about earnings, and third quarter earnings season is starting off well with positive surprises from financial stocks, we believe there is reason to be a buyer of weakness.
The NFIB Small Business Optimism Index declined 2 points to 98.8 in September. Five of the 13 components that we monitor fell, four were unchanged, and four increased. Actual sales changes have been in negative territory since June 2022, but in September the index rose from minus 9 to minus 7. It was minus 20 in October 2024. It is currently at its best level since March 2023, or in 30 months. See page 5. On the positive side, hiring plans increased 1 point to 16, and job openings were unchanged at 32. A bad omen was that plans to raise prices rose from 26 to 32. This may be linked to the fact that sales expectations fell from 12 to 8. However, the most disturbing index in the survey was the outlook for general business conditions, which fell from 34 to 23. In line with this, the outlook for expansion fell from 14 to 11. See page 6.
The preliminary data for the October Michigan Consumer Sentiment index shows the headline index edging down from 55.10 to 55.0, while the present conditions index rose from 60.4 to 61.0 and the expectations index fell from 51.7 to 51.2. Once again, expectations are bringing sentiment down, but present conditions remain stable to higher. This pattern has persisted since April. October data will be revised and perhaps the Egyptian Peace Summit will improve sentiment. See page 7.
From a technical perspective, the 25-day up/down volume oscillator is at 0.66 and relatively unchanged this week. Even after the October 10 selloff, this indicator remains neutral. However, the last positive readings in this indicator were the one-day overbought readings of 3.15 on July 3 and 3.05 on July 25. This means that this volume breadth indicator is yet to confirm the string of recent new highs made by the popular indices from August to date. To do so, the oscillator should record an overbought reading of 3.0 or higher for a minimum of five consecutive trading days. At present, this indicator suggests advancing volume has been weak and the longer this disparity continues, the greater the risk is that equities experience a near-term pullback. See page 10. *https://crypto-economy.com/famous-trader-opens-massive-163m-bitcoin-short-on-hyperliquid/
Gail Dudack
PLEASE NOTE: Unless otherwise stated, the firm and any affiliated person or entity 1) either does not own any, or owns less than 1%, of the outstanding shares of any public company mentioned, 2) does not receive, and has not within the past 12 months received, investment banking compensation or other compensation from any public company mentioned, and 3) does not expect within the next three months to receive investment banking compensation or other compensation from any public company mentioned. The firm does not currently make markets in any public securities.
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