First recap Q1 risks:
China stocks and bonds crashed. China's non-manufacturing PMI is at decade lows (outside of the pandemic).
The Russian economy was obliterated.
European stocks crashed and the German ZEW investor sentiment index saw its fastest collapse in history, including the pandemic.
The Japanese Yen crashed as the BOJ is determined to keep rates as low as possible to support the imploding economy.
The global bond market collapsed the most on record.
The U.S. Yield curve inverted, while U.S. consumer sentiment collapsed to decade lows.
Global commodities crashed up and and then down. Oil is currently in a bear market -25%
Companies warned on profits due to the effects of the Russian/Ukraine war.
The Nasdaq was down -25% at the lows.
Overall, U.S. markets had their worst quarter in two years.
And amid all of that risk, the Fed fully tapered their balance sheet and raised rates .25%, which sparked a short covering rally and the largest combined breadth thrust in U.S. market history.
You will note however that S&P 500 breadth went nowhere on the week:
Now for the main event.
In Q2, the Fed plans to double their speed of rate hikes AND to begin reducing their balance sheet. As of this writing, odds of a double (.5%) rate increase in May (4th) - one month away - are 73%.
My hypothesis is that whereas the first quarter fully ended the Nasdaq growth rally, which had been rolling over for a year...Q2 will fully end the NYSE value stock rally which has also now been rolling over for a year.
Many say that tops are a "process" not an event. I say tops are a process followed by an event.
Here we see that NYSE breadth (% above 200 dma) has been stair-stepping lower for months. In addition, this is the first time the S&P 500 made a lower high during this breadth divergence.
Mid-pane we see the spike in NYSE lows in January which accompanied the last major plunge lower in stocks.
And we see (bottom) pane the market is overbought:
Banks in particular are warning of recession. Normally they would be rallying during a Fed rate hiking cycle, however they falling due to the yield curve inversion.
In addition, the Energy Sector is now record overbought:
What does Wall Street say about all of this risk?
They admit that this scenario is most like 1973. However, they predict the market will end higher on the year:
"The Goldman team, reiterates it sees the benchmark S&P 500 closing at 4,700 at year-end...a further 4% this year"
The investment bank reckons equities could tumble a further 21% to finish 2022 at 3,600. That would be Goldman's "recession scenario."
"The 2s10s yield curve inverted in 1973, a more comparable period of high inflation...ultimately entered a bear market, falling by 48%"
In other words, the most analogous scenario is not even under consideration.
Cutting through the bullshit, the most LIKELY scenario is that the S&P implodes -50% and then the Fed once again bails out the markets with the market ENDING -20% on the year.
What happens in between however will shake investor confidence to the core and most won't be in the casino in time for bailout.
