The S&P 500 is clinging to a key support level after Friday’s meltdown, here’s what happens if that fails

The aftermath of Friday’s Wall Street bloodbath left the S&P 500 SPX,
-2.91%
clinging to a key technical support level of just over 3,900. With a drop of almost 19% compared to the record close on January 3 of 4,796.56, the index is about to fall to the technical definition of a bear market on Monday.

Our call of the day of RBC Capital’s head of equity strategy, Lori Calvasina, explains what could happen next, along with sectors that could shelter investors a bit.

If this May 19 low is not maintained and the index “breaks below 3,850 (the outer limit of the territory frightening growth, ie the declines of 2011 and the end of 2018), we see a potential downward at the S&P 500 to just over 3,200, ”he tells customers in a new note.

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

The 34% reduction in the pandemic in early 2020 marks a “reasonable starting point for thinking about the extent to which the S&P 500 could fall this time in a recessionary fall. It is equally important to note, however, that there is it is a priority for US stocks to stabilize above this level, “he added.

For example, the downturns of the recession in the early 1980s amounted to 17% and 27%, and in 1990 this peak movement was at least 19.9%. “The decline of 18.7% that has already been seen in early 2022 is worse than one of the declines of the 1980s and is approaching the decline of 1990. A reduction of 27% would bring the S&P 500 slightly below 3,500, ”he said.

Aside from the CPI’s horror show on Friday, Calvasina said its economic team was especially alarmed by a rise in 5-year inflation expectations to 3.3% of the sentiment poll of the University of Michigan Consumers published later that day. Like others, they are concerned about the Fed’s more aggressive hikes, hurting consumers.

What actions could best come out in this scenario? Calvasina and the team examined how different sectors within the S&P 500 and Russell 2000 have traded throughout history in relation to inflation expectations.

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

Healthcare stocks have had the most negative correlations with inflation expectations, both within small and large capitalizations, while consumer discretionary and communications services have gone even worse, he said.

See: These 19 large-cap stocks have now fallen by at least 60% from their 52-week highs

“The overall conclusion: this change in long-term inflation expectations could delay the change in Value for Growth we were expecting,” he adds.

As for the recession itself, small-cap stocks tend to be the hardest hit in the downturns associated with recessions, but then they see strong rebounds starting halfway through those falls, Calvasina notes. Therefore, since small capitalizations are pure play of the national economy, they are the ones to watch out for when the risks of recession are in the water.

Calvasina saw an encouraging sign on Friday: the resilience of the Russell 2000 RUT,
-2.73%
relative to the S&P 500, given the positioning of small-cap futures contracts among asset managers had already fallen well below the lows of the Great Financial Crisis.

One last word from the strategist: According to history, if a recession starts, some sectors will probably be closer to setting a price than others.

“As of May 19 (which is still last year’s low at the S&P 500 as of Friday), the falls that had been seen in the S&P 500’s communications services, consumer goods and goods sectors The average of the S&P 500s had significant gaps, with most of the other sectors in the S&P 500 the largest observed for Energy, “he said.

The buzz

Cryptocurrencies continued to sell over the weekend, with bitcoin BTCUSD,
-12.42%
below $ 25,000, a level not seen since the end of 2020. The Celsius cryptocurrency lending platform was forced to stop all withdrawals and transfers citing “extreme market conditions” as its testimony digital CEL fell about 50% on Sunday afternoon.

And MicroStrategy MSTR technology shares,
-6.61%
it sank as bitcoin margin calls approached.

Start of electric vehicles Electric Last Mile Solutions ELMS,
-1.33%
he said he has filed for bankruptcy a couple of months after losing his two top executives. It also confirmed an investigation by the U.S. Securities and Exchange Commission.

Asian markets are being hit by both US inflation and mass testing in a densely populated district of Beijing that is suffering from a “fierce” outbreak of COVID.

Monday’s data calendar is empty, and markets are only running low this morning. Along with the Fed’s result on Wednesday, May retail sales will mark the highlights of the week.

The markets

ES00 stock futures,
-2.22%

YM00,
-1.79%

NQ00,
-2.79%
as bond yields continue to fall, with Treasury yields at 10 years above 3.17% and TMUBMUSD02Y at two years,
3,191%
above 3.14%. Concerns over recession are driving up CL.1 oil prices,
-1.33%

BRN00,
-1.26%
and the entire lower energy section. Or GC00,
-0.82%
while the DXY dollar is down,
+ 0.56%
swallows refuge flows, reaching their maximum against the USDJPY yen,
+ 0.04%
since 1998.

The graph

Here’s a breakdown of what happens with Jonathan Krinsky’s bitcoin from BTIG, which notes that the inability of cryptography to hold $ 30,000 means it could go down to $ 20,000:

The tickers

These were the most searched tickers on MarketWatch from 6 a.m. East:

Random readings

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