Stock Drop on May 24 As Recession Odds Rise

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Stocks had a volatile session following Snap’s disastrous revenue surprise, and then to top it off, new home sales missed analysts’ estimates by a vast margin. It sent stocks sharply lower most of the day before rallying back after the European close at 11:30 AM to finish lower by 81 bps.

The move down today looks similar to the move we saw last week when the market sold off following Powell’s WSJ interview, with that bear flag pattern. I don’t know if this plays out the same way, but the patterns look very similar.

Recession Odds

What seems to be happening is that the market is increasingly pricing in the risk of a recession occurring here in the US and a Fed Pivot. Eurodollar futures are currently suggesting that the first-rate cut may come in September 2023, but that has slowly been moving forward as the number of rate hikes is being reduced.

Does it mean that the equity market is closer to a bottom? The biggest problem is that futures are pricing in fewer rate hikes and a Fed pivot, but the reason for the changes in these expectations is that the market expects a recession, and that is not good for equity prices.

It is starting to get reflected in the dollar index, and while it could just be a short-term pullback, you can see that the RSI has broken the trend line and may have signaled a significant shift in momentum.

That leaves the next shoe to drop for the equity market, which will be earnings estimates. That hasn’t happened yet, but that is likely to change by the time we get through the middle of July.

Snap fell by 43% today and managed to fill that gap around $13 pretty nicely. The good for Snap is that are no more gaps to fill.

Facebook did manage to fall out of that diamond pattern today, which could indicate that the stock has more downside to come.

That’s all there is going to be today.


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