The S&P 500 clings to a key level of support after Friday’s collapse, here’s what happens if it fails

Last week’s US inflation shock continued to fall in the markets, with buyers seeming to be hiding. The most affected Nasdaq-100 futures are falling 3%.

Investors are now focused on Wednesday’s Fed result, with expectations that the central bank may need to do something bold, driving even more stress out there.

The aftermath of Friday Street’s bloodbath left the S&P 500 SPX,
-2.91%
cling to a basic level of technical support just over 3,900. A drop of almost 19% from the record close on January 3 at 4796.56 points, the index is ready to slide into the technical definition of the bear market on Monday.

Us call of the day by RBC Capital’s chief stock strategist Lori Calvasina describes what could happen next, along with areas that could protect investors a bit.

If this May 19 low is not maintained and the index breaks below 3.850 (the outer limit of the fear for growth, eg the 2011 withdrawals and the end of 2018), we see a possible fall in the S&P 500 in just over 3,200. He tells customers in a new note.

“This would represent a 32% drop in the S&P 500 from a high in early January 2022, which is in line with the average recession in the S&P 500 since the 1930s,” Calvasina said.

The 34% drop in the early 2020 pandemic marks a “reasonable starting point to think about how low the S&P 500 could go this time around in a recession.” “It is equally important to keep in mind, however, that there is a priority for US stocks stabilizing above this level.”

For example, the recession cuts in the early 1980s totaled 17% and 27%, respectively, and in 1990 this sharp move totaled 19.9%. “The 18.7% drop already seen in early 2022 is worse than one of the declines of the 1980s and close to the 1990s recession. A 27% drop would lead the S&P 500 to just under 3,500.” , he said.

In addition to Friday’s CPI horror show, Calvasina said its financial team was particularly concerned about rising 5-year inflation expectations to 3.3% from the University of Michigan Consumer Survey published later that day. . Like others, they are worried about more aggressive increases by the Fed, hurting consumers.

Which stocks can perform best in this scenario? Calvasina and the team looked at how different sectors within the S&P 500 and Russell 2000 have historically traded on inflation expectations.

Within large and small capital, they found that energy and finance had the most positive correlations with long-term inflation expectations and outperformed their performance as they increased. High-capitalization materials also tend to outperform the S&P 500 in this scenario.

RBC US Equity Strategy, Haver. From May 2022

Healthcare shares had the most negative correlations with inflation expectations, both in small and large capitalizations, while consumer discretion and communication services did even worse, he said.

Checkout: These 19 large-cap stocks have now fallen at least 60% from their 52-week high

“The big picture: the change in long-term inflation expectations could delay the shift from Value to Growth that we expected,” he added.

As for the recession itself, small-cap stocks tend to be hit hardest by recession-related declines, but then there is a strong recovery that starts in the middle of these declines, Calvasina notes. Therefore, since small capitalizations are purely toys for the domestic economy, they are the ones to watch out for when the risks of recession are in the water.

Calvasina has seen an encouraging sign since Friday – the resilience of the Russell 2000 RUT,
-2.73%
compared to the S&P 500, as the position in futures contracts between asset managers had already fallen far below the lows of the Great Depression.

One last word from the general – based on the story, if a recession starts, some areas are probably closer to pricing than others.

“As of May 19 (which remains the low YTD in the S&P 500 since Friday), the reductions observed in the S&P 500 Communication Services, Consumer Discretionary and Consumer Staples sectors were close to the lower average movements observed in these sectors in recent years. four broader withdrawals related to the market downturn. “Most other areas of the S&P 500 had significant gaps, with the largest being for Energy,” he said.

The hum

Cryptocurrencies continued to sell out over the weekend, with bitcoin BTCUSD,
-12.31%
below $ 25,000, a level not seen since the end of 2020. The Celsius Crypto Lending Platform was forced to suspend all withdrawals and transfers citing “extreme market conditions” as its CEL digital badge fell close to 50% late in the year. Sunday.

And shares of MicroStrategy MSTR technology,
-6.61%
collapsed as bitcoin margin calls appeared.

Digital World Acquisition DWAC,
+ 0.39%
fell 8.2% after the special purpose acquisition firm (SPAC), which acquires the company behind Donald Trump’s Truth Social, said it had received another SEC summons on the deal.

Start EV Electric Last Mile Solutions ELMS,
-1.33%
said it had declared bankruptcy, a few months after losing its two top executives. It also confirmed an investigation by the US Securities and Exchange Commission.

Asian markets are being hit by both US inflation and mass trials in a densely populated area of ​​Beijing hit by a “wild” COVID outbreak.

Monday’s data calendar is empty, letting markets simmer in panic this morning. Along with Wednesday’s Fed result, May retail sales will signal the focus of the week.

The markets

Future fulfillment contracts ES00 shares,
-2.17%

YM00,
-1.71%

NQ00,
-2.77%
move lower as bond sales continue, with the interest rate on the 2-year bond TMUBMUSD02Y,
3.166%
approaching the 10-year TMUBMUSD10Y,
3.252%
and threatens to reverse the yield curve again. Concerns about the recession are driving CL.1 oil prices,
-1.27%

BRN00,
-1.14%
and the whole energy section lower. Gold GC00,
-1.24%
is down, while the DXY dollar,
+ 0.47%
devours the flows of paradise, reaching the highest level against the USDJPY yen,
-0.24%
since 1998.

The diagram

The following is an analysis of what happens to bitcoin by Jonathan Krinsky of BTIG, who points out that the cryptocurrency’s inability to hold $ 30,000 means it could fall as low as $ 20,000:

BTIG / Bloomberg

The tickers

These were the items with the top searches on MarketWatch from 6 a.m. Eastern:

Heart

Security name

TSLA,
-3.12%

Tesla

GME,
+ 0.09%

GameStop

AMC,
-2.74%

AMC Entertainment

RDBX,
+ 39.39%

Redbox Entertainment

ΝΙΟ,
-3.61%

ΝΙΟ

AAPL,
-3.86%

apple

AMZN,
-5.60%

Amazon

IMPP,
+ 7.56%

Imperial Petroleum

NVDA,
-5.95%

Nvidia

DAD,
-0.05%

Alibaba

Random readings

A Google employee has been suspended because he claimed that the AI ​​chat robot has thoughts and feelings

This lion almost went blind until the Indian doctors came up

How bad is inflation? Even Snoop Dogg’s blunt cylinder gets bigger

Need to Know starts early and is updated until the start bell, but sign up here to receive it once in your email. The email version will be sent around 7:30 p.m. east.

Want more for the next day? Subscribe to The Barron’s Daily, a morning investor briefing, including exclusive commentary by Barron’s and MarketWatch authors.

Leave a Reply

Your email address will not be published.