In a strong risk-on environment, major stock indices continue to climb, propelling cryptocurrencies upward, albeit with some caution. The S&P 500 reached a record high for the fourth consecutive trading day, achieving a milestone of 6,519 points. Similarly, the Nasdaq index also reached lifetime highs, while the Dow Jones remained close to its recent peak.
Despite the robust performance in equities, the market largely dismissed a bearish September manufacturing survey. A significant factor contributing to this bullish momentum was a fall in bond yields, with investors anticipating a 25-basis-point cut by the Federal Reserve in their upcoming meeting. Fed funds futures indicate a projected decrease in rates from the current 4.25% to around 3% within the next year.
In the cryptocurrency sphere, Bitcoin (BTC) has struggled to gain direction. Trading between $114,000 and $117,000, it formed a Doji candle pattern that signals indecision. Currently priced at $115,860, Bitcoin’s performance remains lackluster compared to its August record high of over $124,000. This stagnant price action might be attributed to long-term holders cashing in profits, which counteracts the bullish enthusiasm fueled by spot ETF inflows.
Other major cryptocurrencies are also experiencing downward momentum. Ethereum’s ether has seen a decline from nearly $4,800 to $4,500 in just three days, following a previous peak above $5,000 last month. This drop is surprising, as ether’s staking yield makes it an appealing investment option amid anticipated Fed rate cuts. XRP has slipped back to $3.00, failing to sustain bullish momentum from a prior breakout. Dogecoin, a meme-driven token, has plummeted from 30.7 cents to 26.7 cents due to reports of significant selling activity by major holders.
Market analysts are eyeing the potential for a 25-basis-point rate cut to rejuvenate Bitcoin’s upward trajectory. However, a more surprising 50-basis-point cut could unleash volatility, stirring dramatic movements across stocks, cryptocurrencies, and gold.
Adding to the cautious atmosphere, the VIX index, which measures expected volatility in the S&P 500, saw a notable rise of over 6% to 15.68 points. While this level remains historically low, the upward spike is noteworthy. Historically, the VIX and stock prices often move in opposite directions, and a breakdown of this correlation might indicate an impending market correction. According to Menthor Q, a market intelligence platform, the simultaneous rise of both the S&P 500 and VIX could signal that traders are overly optimistic, paving the way for potential vulnerabilities.
The demand for options may have influenced the VIX’s increase, possibly as traders sought puts or other forms of downside protection. This expectation of a correction follows the anticipated Fed rate cut on Wednesday.
Bitcoin’s implied volatility also saw a rise of 3% on the same day, indicating expectations for price fluctuations over the upcoming month. Historically, Bitcoin’s implied volatility has had a positive correlation with the VIX, although this relationship has shifted since the introduction of spot ETFs and political developments last year. Market participants will be closely watching these indices, as their movements could provide critical insights into future trends.
