- Bitcoin's 10% selloff since June 7 signals a warning for the broader stock market.
- Stifel strategist Barry Bannister highlighted a strong correlation between bitcoin and the Nasdaq 100.
- Bannister said he expects a correction in stocks in the summer, influenced by higher interest rates for longer.
Bitcoin The 10% selloff since June 7 is sending a warning signal to the broader stock market, according to Stifel strategist Barry Bannister.
In a note on Wednesday, Bannister highlighted the strong correlation between bitcoin and the Nasdaq 100 since 2020, as the cryptocurrency shares characteristics of a risky speculative asset rather than a behavioral one as "digital gold."
But while Bitcoin has traded lower in June to around the $65,000 level, the broader stock market continues to hit new all-time highs driven by gains in mega-cap tech stocks like NVIDIA and Apple.
Bitcoin's inability to reach new all-time highs suggests that the stock market is likely to catch up as it is set to fall in line with the cryptocurrency, according to the note.
"Recently, the weakening of bitcoin indicates an imminent S&P 500 correction and consolidation phase of the summer," Bannister said.
Bannister is not the only Wall Street analyst following stock market signals from bitcoin.
Fairlead Strategies founder Katie Stockton told CNBC on Monday that she, too, is following the growing divergence between U.S. tech stocks and bitcoin.
"When we see Bitcoin pull back in that framework and the Nasdaq 100 just move up, that worries us to some extent, just in the short term," Stockton said. "We feel like 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 overloaded here.'"
Adding to Bannister's conviction of an imminent stock market sell-off is the Federal Reserve, which could keep interest rates higher for longer to combat still-high inflation.
"The correction we expect in risk assets is reinforced by our view that the Federal Reserve moves away from its current cautious attitude while inflation remains high ('last mile' issues), thus exposing the overvalued S&P 500 against the financial sector. conditions index and other measures," Bannister said.
In a summer correction scenario, Bannister sees stocks of high-flying big tech companies like Nvidia being hit the hardest as analysts' future earnings estimates show signs of peaking.
"As NVDA follows past cycles, the rising leader may lead the downward 3Q24 correction," Bannister said.
But Bannister admitted he might be one of the first to call for a market correction, as bubbles often march to the beat of their own drum.
The stock is likely to continue rising before experiencing an even more painful drop of around 20%.
"Past bubbles since the 19th century indicate that the S&P 500 could well rise to ~6,000 by the end of 2024 and then make a round trip to near where it began 2024 five quarters later, by ~1Q26 (S&P 500 ~4,800 )," Bannister said.
