Opinion: The change in risk appetite caused by the expectation of a US recession is the reason for the decline in US stocks and cryptocurrencies

According to The Kobeissi Letter analysis, the real reason for the market downturn is the sudden change in risk appetite. Within a few days, the market went from extreme greed to extreme fear. The positioning is so polarized that market sentiment has shifted in a completely opposite direction. Regardless of the fundamentals, emotions are the ultimate driving force behind any market price.

When emotions quickly change, the outflow of funds reaches historical highs, leading to the lightning crash we are witnessing. Data shows that institutional capital exited tech stocks before the decline. As we enter 2025, hedge funds' holdings of the seven major US stocks (Magnificent 7) will drop to the lowest level in 22 months. In the last week of February, the weekly outflow of cryptocurrency funds set a record of $26 billion. This is about $500 million higher than the record set in 2024.