The idea that bitcoin has become a leading indicator of the U.S. stock market appears to be supported by recent experience. Consider: bitcoin BTCUSD, +0.62% hit an all-time high on Nov. 8, 2021 and then fell precipitously. The Nasdaq Composite COMP, +3.41% followed with its all-time high on Nov. 19, while the S&P 500 SPX, +1.89% hit its all-time high on Jan. 3 of this year.
Bitcoin then tumbled, reaching a low on Jan. 21. Both the Nasdaq Composite and the S&P 500 followed suit, each hitting their lows on Jan. 27 and posting their worst January return since the Great Financial Crisis of 2008-09.
These data points have coincidence but do not have statistical significance. To determine if a more systematic pattern exists, I analyzed daily price histories for bitcoin, the S&P 500, and the Nasdaq Composite.
To test whether bitcoin is a good leading indicator, I needed to specify the length of the look-back and the look-ahead periods. As you can imagine, there are an indefinitely large number of possible combinations to study. The look-back period for the Nasdaq Composite was 11 days in November and six days in January. For the S&P 500 it was eight weeks in one case and six days in another.
I was unable to test all possible combinations. But the results of those tests I did run were not encouraging.
The table below reports the track record of bitcoin’s return over the trailing 1-, 3- and 6-month periods to predict the S&P 500’s and Nasdaq Composite’s return over the subsequent 1-, 3- and 6-month periods. I focused on the five-plus years since the beginning of 2017, since it was in early 2017 that bitcoin first traded above $1,000 and its trading volume began to grow. (The results for the period prior to 2017 were even less encouraging.)
The statistic I report in this matrix is the r-squared, which ranges from 0% to 100%, with 0% meaning that bitcoin’s return had no power whatsoever to explain or predict the S&P 500’s or the Nasdaq Composite’s subsequent performance. As you can see, none of the r-squareds were higher than about 2%, and in any case, none of these r-squareds is significant at the 95% confidence level that statisticians often use when determining if a pattern is genuine.
Bitcoin’s return over trailing month
Bitcoin’s return over trailing 3 months
Bitcoin’s return over trailing 6 months
S&P 500’s return over subsequent month
Nasdaq Composite’s return over subsequent month
S&P 500’s return over subsequent 3 months
Nasdaq Composite’s return over subsequent 3 months
S&P 500’s return over subsequent 6 months
Nasdaq Composite’s return over subsequent 6 months
You shouldn’t be surprised by these results, since we don’t have to go back far in our memories to find occasions in which bitcoin’s trend changes had no discernible effect on the stock market. Take the cryptocurrency’s huge swings last year: Bitcoin suffered a three-month bear market between April and July of 2021, for example, during which it dropped by 63%. It then soared more than 120% to its November high. It’s not apparent that either the S&P 500 or the Nasdaq Composite responded to either of those huge swings.
It’s always possible, after the fact, to interpret a price chart of two securities and claim there is some uncanny correlation. But to test if a correlation is real, you need to determine if it also exists in other segments of the historical data. Ideally, you also test it in real time. As far as I can tell, bitcoin fails these tests.
The bottom line? Whatever other qualities you ascribe to bitcoin, being a leading stock market indicator should not be one of them.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at firstname.lastname@example.org
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