Thursday, May 12, 2022

It May Be Time For Stocks To Worry About A Recession

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Believe it or not, despite the big rally on Wednesday, the was down about 50 bps for the week yesterday, with the s down 1%. It’s just odd, given how much we rallied on Wednesday.

So let’s see, when we left off, we were getting ready for Jay Powell to get in front of . It amazes me how one market can hear one thing and how another market can miss the whole message. The bond and currency markets, which are far smarter than equities, responded in a manner that one would expect when the Chair of the FOMC says things like: he intends to raise rates 25 bps in March. Or is open to possibly more than one rate hike at future meetings and may need to tighten above the neutral rate to bring inflation back under control.

Then you have the equity market, which is certainly not the sharpest tool in the shed for Fed messaging. Yet, it managed to focus on the part about only a 25 bps hike in March and rallied, totally missing the more important message.

Yields

So what happened? Well, what I said would happen, bond yields were offside and saw a massive sell-off on the front of the curve, with the climbing to 1.52% from 1.28%.

But perhaps more important is that the has not to kept pace, resulting in the ten minus two-year spread dropping below 40 bps, and now trading at just 31 bps. At this point, the spread could be heading straight for ten bps. A move like this should get the market to think about the rising chances of a recession.

US10Y-US02Y Daily Chart

Oil and Dollar

If that doesn’t freak the market out, then a soaring and prices are the only things better than a potential yield curve inversion. It only takes one to kill global growth; when you get both, the odds of recession seem high.

USD Index Daily Chart

So let’s think about this, the dollar and oil are soaring, the Fed is talking about raising rates, running off the balance, and the potential to push rates beyond neutral? How is the equity market not freaking out?

S&P 500

The has been range-bound. The patterns have been hard to identify, which happens with a range-bound market. So I feel like I’m grabbing to find something. If tomorrow’s job report shows that wage inflation is taking hold now, I think fears of stagflation will take hold, but it is a recession one needs to worry about. I think the S&P 500 drops below 4,350 and tries to fill that gap at 4,300. Once that happens, I think we are on our way to below 4,200.

SPX Chart

Tesla

Perhaps Tesla (NASDAQ:) is giving us a preview. The stock already fell below $840 and looks well on its way to the gap fill at $810.

Tesla Inc Chart

Zoom

Zoom (NASDAQ:) has been a pretty good leading indicator for the market, and today it made another lower low and probably a signal of the ’s eventual drop too. For Zoom, $107 seems like the destination.

NASDAQ

Talking about the NASDAQ, it’s awful when the number of new stocks making new highs-new lows on a cumulative basis is making new lows every signal day. I don’t see how the market sees a meaningful rebound until this indicator flatlines. That is what has indicated bottoms in the past.

NAHL Cumulative Chart

Aren’t you glad I’m back?

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