The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
It’s still Bitcoin.
Today was a quiet day. Overnight futures traded flat and without much action. The S&P opened about +14 but quickly returned to flat, where it traded until 2 PM. At that point The S&P broke 20 points lower in a handful of minutes. There were no headlines to blame. However Bitcoin, which traded flat overnight, had been weakening slowly all day. At 2 PM, Bitcoin broke lower quickly. It led stocks by around 4 minutes. Both Bitcoin and the S&P fell quickly, by a modest amount. Then Bitcoin bounced, returning to its 2 PM levels. The S&P did the same. The linkage between Bitcoin and the S&P is strange, but it exists. Bitcoin is usually the leading asset in this relationship.
The correlation between Bitcoin and the S&P is not very good when you look at longer time horizons. However on a tick-for-tick basis, the correlation has increased in the last few days. We’ve covered the psychological reasons for the connection to exist. The hunch the market has, that Bitcoin pain will directly instigate equity pain, is reasonable but it also requires confirmation. The market will not continue to react to Bitcoin without evidence. Markets are *anticipating* some kind of chain reaction between the markets. It won’t anticipate that forever. There has to come a point where the equity market stops worrying about the story that never broke.
I don’t know how long that will take. As long as Bitcoin and the S&P show this directional connection, we know that stock investors are thinking about the linkage that *might* exist. If proof of that linkage never comes, the strength of the trading connection will wane.
Time will break the link *if* no story comes out. But even if no story breaks, each drop in Bitcoin strengthens the trading connection simply because of the increasing fear of *what-if.*
This means that the stock market, in the short term, can only climb if Bitcoin climbs.
We’re all Bitcoin investors for a while, it seems. I don’t like it but I can’t change it.
See you tomorrow.
-Mike
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