Market review 23.03.12
Banks, bonds, and humble pie
Hello everyone,
What an ugly week.
Regional banks got hit the hardest, followed by profitless tech, resource stocks, and China. Treasury bonds were one of the few areas up on the week.
In today’s post, I will discuss all these areas.
Banks & Bonds
Regional banks got hit hard thanks to the failures of Silvergate Capital and Silicon Valley Bank (SVB). Silvergate was a top crypto lender and SVB served the broader tech startup world. The latter’s bankruptcy happened in just 2 days and is the 2nd biggest bank failure in US history.
A summary on how SVB failed:
From late ‘19 to early ‘21, tech startups were flush with cash which they poured into their favorite bank. SVB took those funds and put them in bonds (unfortunately when bond prices were high).
By the end of ‘21, SIVB (the ticker for SVB) outperformed KRE by more than 2x in 2 years. Times were great!
In ‘22, as interest rates surged, the decline in tech stocks accelerated and VC funding dried up. Meanwhile, yields on bank deposits remained puny. Companies began withdrawing their deposits to meet payroll and/or put funds in higher yielding T-bills.
SVB then had to tap into their long-term bond assets, which fell a lot in value thanks to rising interest rates. This immediately triggered a $2B write-down on the bank’s balance sheet, which further spooked depositors, resulting in a bank run and then bankruptcy.
We didn’t need to know these news events. KRE has been a severe laggard for a while, so it should be no surprise that it was the hardest hit this week.
I saw a headline yesterday that read “Banking sector sparked a massive selloff in yields.” I have an issue with this statement.
KRE:SPY had been diverging from TNX for months. That was a warning that yields might ultimately fall.
When TLT and 2yr Bonds hit support (combined with ‘smart money’ being record long bonds), I mentioned to be careful being too bearish on bonds. We’re seeing follow through on the charts:
I’ll also note that just like KRE:SPY has led bond yields, bond yields in turn lead the Fed.
China & Materials: Eating humble pie
While I got bonds right (so far), I completely blundered China and materials.
Just last week I was highlighting these two areas as bullish, but they’ve fallen over 10% since then. Markets are always a humbling experience.
That confluence of support on KWEB I discussed last week? Broken.
Within materials, XME weekly broke down. Same with SLX (the steel ETF).
TECK also broke down – among many other individual names:
Shippers like SBLK and EGLE are breaking down:
Perhaps just like KRE:SPY was giving a warning about bond yields, the Baltic Dry Index (BDI) could be warning us about materials:
Given all these charts, I reduced my exposure to respect risk. Price is above positioning, economic reports, seasonality, and all the rest.
One area in this space that I got right was BDRY – but of course, I had no position in it. 🤷🏽♂️
Taking a step back
It’s easy to get lost in everything that happened last week. People are worried of a contagion now.
But I want to show you some bigger-picture charts that still look constructive (a fancy word for bullish).
First, VEU Monthly remains above major support:
Nikkei Quarterly still looks great. Here’s a thread that also shows Japan on a weekly and monthly timeframe.
XGRO (an ETF containing 80% global stocks and 20% bonds) remains above base support on the weekly.
Even high-beta Bitcoin remains above major support:
Ditto for XSD (semiconductors ETF). Many individual semis have pulled back to 1+ year support after being at 52-week highs recently (see AVGO, AEHR, and LSCC).
Continuing this discussion on tech: If bonds are bullish, can we see large-cap tech outperform more traditional sectors?
Financials vs. Nasdaq-100 (NDX) have already rolled over. Also, QQQ, SMH, and XLK fared better than many parts of the market this week.
Perhaps the ratios shown in the chart below pull back, forming bigger bases.
The performance of QQQ and DBC so far this decade is head-to-head, but I can see the Q’s overtake commodities in the short-term.
Closing Notes
It was a brutal week and I got stopped out of China & Materials. However, I am still maintaining exposure to global stocks and select tech (XLK, SMH) as their charts remain constructive.
I’ll leave with some great tweets from Ian that you can reflect on:
That’s all for this week! If you found this post useful, please give it a like and share.
Stay safe out there.
Twitter: @alphacharts.
Important Disclaimer: This blog is for educational purposes only. I am not a financial advisor and nothing I post is investment advice. The securities I discuss are considered highly risky so do your own due diligence.