Bitcoin Signalling Major Risk Off Trade?

A look at the relationship between bitcoin returns and other asset class returns over the last year throws up some interesting details. There is a weak inverse relationship between bitcoin returns and the 10 year bond yield changes but the relationship between other asset class returns and bitcoin returns is not statistically significant. This suggests a continued melt down in bitcoin is a precursor to higher bond yields which could trigger a move out of risky assets:

Bitcoin Returns Vs Other Asset Class Returns	Correlation	Significance
S & P 500	0.156	0.273
Ten Year Bond Yield	-0.340	0.015
Euro	0.034	0.813
Gold	0.047	0.743
Copper	-0.160	0.261
Crude	-0.180	0.207

A look at the relationship of bitcoin itself with other asset classes over the last year reveals some additional info. We can see that bitcoin shows a strong positive relationships with most asset classes and the ten year bond yield and a strong negative relationship with copper. This suggests that the recent sell off in bitcoin could be a precursor to a major risk off trade:

Bitcoin Vs Other Asset Classes	Correlation	Significance
S & P 500	0.860	0.000
Ten Year Bond Yield	0.530	0.000
Euro	0.673	0.000
Gold	0.476	0.000
Copper	-0.879	0.000
Crude Oil	0.800	0.000

Market Signals for the US stock market S and P 500 Index and Indian Stock Market Nifty Index for the Week beginning March 12

Indicator	Weekly Level / Change	Implication for S & P 500	Implication for Nifty*
S & P 500	2787, 3.54%	Bullish	Bullish
Nifty	10227, -2.21%	Neutral **	Bearish
China Shanghai Index	3307, 1.62%	Bullish	Bullish
Gold	1324, 0.05%	Neutral	Neutral
WTIC Crude	62.04, 1.29%	Bullish	Bullish
Copper	3.14, 0.37%	Neutral	Neutral
Baltic Dry Index	1201, 0.42%	Neutral	Neutral
Euro	1.2307, -0.09%	Neutral	Neutral
Dollar/Yen	106.77, 0.98%	Bullish	Bullish
Dow Transports	10740, 3.94%	Bullish	Bullish
High Yield (ETF)	36.09, 0.25%	Neutral	Neutral
US 10 year Bond Yield	2.89%, 1.30%	Bearish	Bearish
Nyse Summation Index	164, 1023.97%	Bullish	Neutral
US Vix	14.64, -25.27%	Bullish	Bearish
Skew	128	Neutral	Neutral
20 DMA, S and P 500	2714, Above	Bullish	Neutral
50 DMA, S and P 500	2742, Above	Bullish	Neutral
200 DMA, S and P 500	2571, Above	Bullish	Neutral
20 DMA, Nifty	10420, Below	Neutral	Bearish
50 DMA, Nifty	10606, Below	Neutral	Bearish
200 DMA, Nifty	10140, Above	Neutral	Bullish
India Vix	14.52, 3.22%	Neutral	Bearish
Dollar/Rupee	64.93, -0.39%	Neutral	Neutral
Overall	S & P 500	Nifty
Bullish Indications	10	6
Bearish Indications	1	6
Outlook	Bullish	Neutral
Observation	The S and P 500 rallied and the Nifty fell last week. Indicators are mixed. The markets have made important tops. Time to watch those stops.
On the Horizon	New Zealand – GDP, China – Industrial production, Euro Zone – German ZEW economic sentiment, CPI, Switzerland – SNB rate decision, U.S – CPI, Retail sales, Oil inventories, Canada – Poloz speech
*Nifty	India’s Benchmark Stock Market Index
Raw Data	Courtesy Google finance, Stock charts, investing.com
**Neutral	Changes less than 0.5% are considered neutral

Image from marketwatch.com

The S and P 500 rallied and the Nifty sharply under performed last week. Indicators are mixed for the upcoming week. Quantitative tightening by the FED is yet to be priced in fully. The markets are still trading well over 3 standard deviations above their long term averages from which corrections usually result. Divergences in high yield and surging bond yields are flashing warning signs. An interest rate shock can’t be ruled out. Indian market volatility is still below US market volatility so there is complacency and some catch up left on the down side. The critical levels to watch are 2800 (up) and 2775 (down) on the S & P and 10300 (up) and 10150 (down) on the Nifty. A significant breach of the above levels could trigger the next big move in the above markets. You can check out last week’s report for a comparison. Love your thoughts and feedback.