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Does Bitcoin action suggest a correction in the US stock market?

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Analysis by Golden FX Link Capital chief financial analyst George Black

Does Bitcoin action suggest a correction in the US stock market?

Assets like Bitcoin normally have no connection with equity markets, but current sentiment in the biggest crypto currency correlates with much of the broader market this month, as investors start to plan new strategies for profiting in the emerging post-pandemic economy.

Bitcoin, according to Nasdaq.com, dropped over nine per cent as tweets from Tesla, Inc CEO Elon Musk stirred some controversy. Investors viewed these as a sign he plans to dump his $1.5 billion stake in the crypto currency.

The recent sell off in Bitcoin could be suggesting that Wall Street’s risk tolerance is shifting to the bearish side.

Given this, higher volatility is continuing into the end of this month, which will present many opportunities to profit from both the buy side and the sell side of the market. Now that earnings season is wrapping up, investors will also mainly focus on inflation.

The continued growth in consumer prices may cause the Federal Reserve to tighten monetary policy by raising short-term interest rates, which will affect stocks and other assets that have been benefiting from the Fed’s easy money.

This week, investors were looking to the release of the minutes of the Federal Reserve’s rate-setting meeting on Wednesday for direction as to the central bank’s policy and strategy to manage inflation.

Moreover, gold futures are rising to the highest level since early this year as investors this month pour money back into the SPDR Gold Trust – the largest gold-backed exchange-traded fund.

Oil prices are stable this week, rising mildly due to a weaker US dollar and the reopening of the Colonial Pipeline late last week, which could increase supply and support gasoline demand heading into the remainder of the month.

Expect more volatility going into the second quarter earnings season while investors await corporate results and guidance, but US stocks overall will continue to strengthen despite each new challenge in this economic recovery.

Given these fundamentals, for this week’s trading recommendation, S&P 500 (SPX500) investors should sell, setting the stop-loss function above the recent high of 4240, with the first take-profit function at 3900-3950, the second at 3700-3760 and the third at 3660-3700.

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