A Warning Sign for the Stock Market: Why Bitcoin’s 10% Sell-Off Matters
A Correlation Between Bitcoin and the Nasdaq 100
Bitcoin’s recent 10% sell-off since June 7 has raised concerns among analysts, with Stifel strategist Barry Bannister warning that this downturn may signal an imminent correction in the broader stock market. According to Bannister, bitcoin has been strongly correlated with the Nasdaq 100 since 2020, as the cryptocurrency shares characteristics with speculative risk-on assets rather than behaving like “digital gold.”
The strong correlation between bitcoin and the Nasdaq 100
While bitcoin has traded lower in June, reaching around the $65,000 level, the broader stock market continues to hit new record highs driven by gains in mega-cap tech stocks like Nvidia and Apple. However, Bannister believes that bitcoin’s inability to hit new record highs suggests that the stock market is likely to decline in line with the cryptocurrency.
“Recently the weakening of bitcoin signals an imminent S&P 500 summer correction and consolidation phase,” Bannister said.
A Broadening Divergence Between Tech Stocks and Bitcoin
Fairlead Strategies founder Katie Stockton also highlighted the broadening divergence between US tech stocks and bitcoin. In an interview with CNBC, Stockton expressed concerns about the short-term implications of this divergence.
“When we see bitcoin pulling back in that framework and the Nasdaq 100 just forging higher, that concerns us to some degree, just short term,” Stockton said. “We do sense that that divergence is something that will ultimately probably catch-up with the Nasdaq 100 Index as soon as people say ‘well wait a second, Nvidia is maybe a little overstretched here.’”
Nvidia’s stock price has been increasing steadily
The Federal Reserve’s Impact on the Stock Market
Adding to Bannister’s conviction of an imminent stock market sell-off is the Federal Reserve’s potential decision to keep interest rates higher for longer to combat still-elevated inflation.
“The correction we expect in risk assets is furthered by our view that the Fed shifts away from its current cautious dovishness as inflation remains high (’last mile’ issues), thereby exposing the over-valued S&P 500 vis-a-vis the financial conditions index and other measures,” Bannister said.
A Potential Correction in the Stock Market
In a summer correction scenario, Bannister sees high-flying Big Tech stocks like Nvidia getting hit the hardest as analysts’ forward earnings estimates show signs of peaking.
“As NVDA follows past cycles, the leader on the way up may lead the 3Q24 correction on the way down,” Bannister said.
A potential correction in the stock market
While Bannister acknowledged that he might be early on his call for a market correction, as bubbles often march to the beat of their own drum, he believes that the S&P 500 could rise to around 6,000 at year-end 2024 before experiencing an even more painful decline of about 20% in the following quarters.
“Past bubbles since the 19th century indicate the S&P 500 could well rise to ~6,000 at year-end 2024 and then round trip to near where 2024 began five quarters later, by ~1Q26 (S&P 500 ~4,800),” Bannister said.
Conclusion
The recent 10% sell-off in bitcoin has raised concerns among analysts about the potential for a correction in the broader stock market. With the strong correlation between bitcoin and the Nasdaq 100, as well as the broadening divergence between US tech stocks and bitcoin, Bannister believes that the stock market is likely to decline in line with the cryptocurrency. While there is still a possibility that stocks could continue to rise before experiencing a more painful decline, investors should be cautious and prepared for a potential correction in the stock market.
