Bitcoin is sending a warning that the stock market is about to sell off, Stifel says

• 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 summer correction in stocks, driven by longer-term higher interest rates.

Bitcoin’s 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 as a speculative risk asset rather than behaving like “digital gold.”

But while bitcoin has traded lower in June at around $65,000, the broader stock market continues to hit new record highs driven by gains in megacap tech stocks like Nvidia and Apple.

Bitcoin’s inability to hit new record highs suggests that the stock market is likely to play a rally as it is set to fall in line with the cryptocurrency, according to the note.

“Bitcoin’s recent weakness signals an imminent summer S&P 500 correction and consolidation phase,” Bannister said.

Bannister isn’t the only Wall Street analyst taking stock market tips 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 pulling back in that frame and the Nasdaq 100 just going higher, that worries us to some extent, just short-term,” Stockton said. “We understand that this divergence is something that will eventually probably hit the Nasdaq 100 once people say ‘well wait a second, Nvidia is probably a little overextended here.’

Convincing Bannister of an impending sell-off in the stock market is the Federal Reserve, which may keep interest rates higher for longer to combat still-elevated inflation.

“The correction we expect in risk assets is further reinforced by our view that the Fed moves away from its current cautious stance as inflation remains elevated (‘last mile’ issues), thereby exposing the S&P 500 to overvalued financials . condition index and other measures,” Bannister said.

In a summer correction scenario, Bannister sees high-tech stocks like Nvidia getting hit the hardest as analysts’ future earnings estimates show signs of peaking.

“As NVDA tracks past cycles, the leader on the upside may lead the 3Q24 correction on the downside,” Bannister said.

But Bannister admitted he may be early in his call for a market correction as bubbles often march to the beat of their own drum.

It is possible that stocks will continue to rise before experiencing an even more painful decline of around 20%.

“Past bubbles since the 19th century indicate that the S&P 500 could rise to ~6,000 by the end of 2024 and then bounce back and forth near where it started 2024 five quarters later, until ~1Q26 (S&P 500 ~ 4,800), Bannister said.