Bear Traps’ McDonald sees a ‘sharp drawdown’ ahead in Nasdaq

Nasdaq Composite is currently up more than 12% year-to-date but Founder of the “Bear Traps Report” says a significant downside may unravel in the coming weeks.

Banking crisis is not over

Larry McDonald is bearish on the equities market primarily because he’s not convinced that worst of the banking crisis is over just yet. Speaking with CNBC’s Becky Quick this morning, he said:

Loans [from 2020 and 2021] are still on banks’ balance sheets. When you take interest rates from 0% to 5% in 13 months, those loans are now worth may be 90 cents to a dollar. Those are massive losses under the surface.

Despite bank failures, the U.S. Federal Reserve opted to raise rates further by 25 basis points last week after the Bureau of Labour Statistics said inflation was still at 6.0% versus a year ago in February (link).

This is a rolling credit crisis

Interestingly, though, Bear Traps’ McDonald agrees that now is more similar to 2018 and not to the Global Financial Crisis.

Nonetheless, he expects pain ahead for the Nasdaq Composite on higher rates and a slow-moving credit crisis. On “Squawk Box”, he said:

This is clearly a rolling credit crisis. Our 21 Lehman systemic risk indicators are pointing at the highest probability of a crash or a sharp drawdown in the next 60 days – highest probability since COVID.

McDonald also noted that only 38% of the NYSE stocks are now trading above their 200-day Moving Average down significantly from 71% in February.