Stocks may keep sliding until institutions join retail investors in capitulation, this firm says

We’re a day away from what could be the first half-point hike from the Federal Reserve in 22 years. Kicking a busy central bank week was the first rate increase since 2010 from Down Under.

So where next for stocks? In our call of the dayRBC Capital Markets equity analysts Lori Calvasina and Sara Mahaffy map out key levels to watch, and see 3,850 as the next rung down the ladder for the S&P 500 SPX
if a low from last Friday’s brutal session does not hold.

Even though it dropped below a March 8 closing low last Friday, “daily trading in the index still resembles most of the post-Financial Crisis growth scares that we’ve previously highlighted as being useful reference points for how low US equities could trade in 2022 , ”The pair explain.

During those “scares” – the 2010 European debt crisis, the 2011 US debt downgrade, the earnings / industrial recession of 2015-16 and the late 2018 China trade war / quantitative tightening selloff – equity declines ranged from 14% to 20%, for an average drop of 17.7%.

RBC

“As of Friday’s close, the S&P 500 was 13.9% below its January 2022 peak, putting it close to the range of a typical growth scare. If a median growth scare drawdown of 17.7% occurs, the S&P 500 would fall to ~ 3,950 this time around, while a late-2018-type drawdown of -19.8% would take the S&P 500 to ~ 3,850, ”said Calvasina and Mahaffy. That’s even if the economy can avoid recession.

And if they are wrong in their core belief that recession can be avoided, they see much downside ahead, as “recession drawdowns since the 1920s for the S&P 500 have averaged ~ 32% vs. their prerecession peaks. ”

The pair are also keeping a close eye on weekly Commodity Futures Trading Commission data on asset manager positioning in US equity futures. While signs of retail bearishness are everywhere, the institutional side isn’t quite there yet, they note. “And it may simply be that in order for the US equity market to bottom, institutional investor sentiment needs to catch down to retail.”

RBC

“This indicator attempted to put in a bottom in Nasdaq and Russell 2000 contracts in March after hitting levels that had marked important lows / turning points in the past,” but never returned to those lows, meaning institutional capitulation isn’t quite in.

RBC

Read: Recession fears are growing. Is this weak stock market trying to tell us something?

The buzz

In a massive blow to abortion rights, the US Supreme Court intends to strike down the landmark Roe v. Wade decision, Politico reported, sparking hundreds to gather in DC.

Pfizer PFE
shares are up on better-than-expected results, with Biogen BIIB
headed the way on disappointing earnings and revenue, while DuPont DD
is tumbling on weak guidance. Advanced Micro Devices AMD,
Starbucks, SBUX
and Caesars CZR,
are among those due to report after the close.

Russia plans to annex large parts of Eastern Ukraine, a US official has warned. And the EU is reportedly looking to Africa to help wean off Russian natural gas.

As the Fed meeting kicks off Tuesday, Australia hiked rates by a bigger-than-forecast 25 basis points. US data on tap includes job openings, factory orders and core capital goods orders after the market open.

The markets

Stock futures YM00

ES00

NQ00
are steady, as bond yields BX: TMUBMUSD10Y

BX: TMUBMUSD02Y
inch up. Oil prices CL00
are softer, along with gold GC00.
Non-holidaying Asia markets were weaker, while Europe equities XX: SXXP
are higher, and the yield on the 10-year German bund BX: TMBMKDE-10Y
rising above 1% for the first time in seven years.

Opinion: Here’s why European value stocks could top US growth plays over the next decade

The tickers

These were the top-searched tickers on MarketWatch as of 6 am Eastern Time:

The chart

“Relative to the US economy, the S&P 500 is still 28% more expense then it was at its 2000 bubble peak,” writes JonesTrading’s O’Rourke, who provides the below chart:

Bloomberg / JonesTrading

Just because stocks have dipped, prices are lower and the valuation is less than it was at the start of the year does not mean the equity market is “inexpensive or attractively valued,” said O’Rourke, who is advising clients against “bottom fishing or dip buying. ”

Random reads

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Rare, centuries old, ‘wicked’ Bible discovered in New Zealand

Kim Kardashian strutted the Met Gala in Marilyn Monroe’s “Happy Birthday Mr. President ”dress

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