More Pain for Bitcoin as Citigroup Warns S&P 500 May Fall by 10%

  • Bitcoin expects to go through a shaky third-quarter on growing worries about a stock market correction.
  • Citigroup sees the S&P 500 rally to drop by at least 10 percent from its current levels, with a worst-case scenario predicting a 20 percent or more decline for the US benchmark index.
  • The monthly correlation between Bitcoin and the S&P 500 is at a record high.

As Bitcoin blindly tails the moves in the US stock market, the chances are that it will fall into a bearish pit.

The worrisome analogy appears valid if one looks at the monthly correlation between Bitcoin and the S&P 500. According to data gathered by Skew, it currently stands at 77.1 percent, reflecting a higher likelihood of Bitcoin imitating the moves of the US benchmark index.

Bitcoin-S&P 500 Realized Monthly Correlation hits an all-time high. Source: Skew

Unfortunately, the S&P 500 is at risk of pausing its rally.

The index has surged by more than 25 percent from its March 23, helped by Federal Reserve’s unprecedented monetary policy to aid the economy through the COVID-induced lockdown.

Nevertheless, its growth has completely sidelined weak economic fundamentals arising from a record number of bankruptcies, expectations of weaker corporate earnings, and resurgence in COVID cases.

Strategists expect the S&P 500 to have its moment of reckoning – a much-awaited bearish correction – as the third-quarter matures.

A 10% Drop Underway

Investment banking giant Citigroup said in an investor note Tuesday that it expects the S&P 500 to fall at least by 10 percent from its current levels. That would land the US index near 2,900.

Citi strategist Tobias Levkovich said the S&P 500, at best, could trade in the 2,700-3,200 area, given that the Fed will continue providing monetary support to the economy. If not, the S&P 500 is at risk of declining by as much as 20 percent – in the 2,500-3,000 vicinity.

S&P 500 is consolidating above 3,000 for more than a month. Source: TradingView.com

“The second wave of debilitating COVID-19 cases that causes either new shutdowns or slower economic recovery would be challenging, not to mention the U.S. elections,” said Mr. Levkovich, adding that “these are not immediate threats,” nevertheless.

Bitcoin

As Bitcoin follows the S&P 500 with a 77.1 percent accuracy, anything bearish for the US index would mean the same for the cryptocurrency. Furthermore, it may also likely remain under downside risks owing to its short-term technical indicators.

Market analyst Teddy Cleps highlighted two of them in his chart published Wednesday. He noted that bitcoin stands trapped under a descending trendline resistance. Meanwhile, its MACD indicator is also forming a Bear Cross, which signals a sell-off ahead.

“Don’t let the euphoria blind you, manage your risk by raising your stop losses,” added Mr. Cleps.

Bitcoin was trading at $9,296 at the time of this writing, up 0.47 percent from its midnight Wednesday open.

Photo by Jorge Franganillo on Unsplash

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