Chart Advisor: Bearish on Banks

By J.C. Parets & All Star Charts

Monday, 13th March, 2023

1/ Bears Talk to Chuck

2/ European Financials Catch Lower

3/ Treasury Yields Plunge

4/ Energy Runs Out of Gas

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1/ Bears Talk to Chuck

Volatility is rocking the banking industry as the dust settles around Silicon Valley Bank, which closed its doors Friday, becoming the second-largest bank failure in U.S. history.

We’re seeing a dramatic repricing of bank stocks as investors shift their focus away from SIVB and toward other regional banks which could be vulnerable for similar reasons.

Shares of Charles Schwab (SCHW), the largest brokerage in the U.S., also took a hit as shown below:

At its lows this morning, SCHW had fallen more than 40% in less than a week, retesting its 1999 highs and erasing roughly $50 billion in market value in the process.

With the stock down over 20% at the start of trading today, management wasted no time in trying to clarify Charles Schwab’s financial condition for investors. The company put out a news release, stating it has “access to significant liquidity,” and for this reason it doesn’t make sense to mark its held-to-maturity portfolio to market.

For now, it appears to have eased, as the stock rebounded steadily throughout the day, erasing much of its earlier losses and closing near the highs for the session.

2/ European Financials Catch Lower

With more U.S. bank stocks collapsing in the last few trading sessions, European Financials (EUFN), which had been resilient, are finally succumbing to selling pressure.

As you can see in the chart below, EUFN is breaking down from a short-term distribution pattern to its lowest level in two months.

Bears are not only taking control and sending prices lower, but momentum has been waning as of late, resulting in a bearish divergence. After today, momentum is at its lowest level since October, and dangerously close to hitting oversold territory.

As long as EUFN remains below 19.45, the path of least resistance could be lower, with risk to the downside for this group of former leaders. We’re watching the 38.2% retracement at 17.70 as the next potential support level.

3/ Treasury Yields Plunge

The yield on the two-year Treasury note has fallen roughly 100 basis points (bps) in just three days of trading as the market reconsiders the Federal Reserve‘s interest rate hikes amid the present banking fallout.

Fed funds futures reversed from signaling a 40% chance of a 50-bp hike last week, to a more than 40% chance of no rate hike today. The market is now pricing in a 0% chance of a 50-bp hike at the next FOMC meeting on March 21-22.

The chart below shows the two-year Treasury yield plunging from over 5% last Wednesday to below 4% today:

As the bond market reacts to the latest news, the stock market has followed suit. Financials, energy stocks, and other cyclical groups that tend to perform better in rising interest rate environments have been under pressure as yields have declined.

Meanwhile, growth stocks, the tech sector, and other speculative areas of the market that tend to perform better with lower interest rates caught a bid today, with the Nasdaq 100 Index leading the major averages. The ARK Innovation ETF (ARKK) was up nearly 3%, while Bitcoin enjoyed its best three-day performance in more than two years. 

The fact that risk assets were able to rally in spite of the volatility from financials and the broader market could be interpreted as a positive development.

4/ Energy Runs Out of Gas

The Energy Sector (XLE) plunged in today’s session, closing at its lowest level since October.

Ever since sellers entered the market at the 93.50 resistance zone in late January, price has been steadily falling, giving back roughly 15%.

Notice how price is now below its 200-day moving average as well as the pivot lows from December and February. As long as this is the case, we could expect further selling pressure for energy stocks in the near term.

We are watching the pivot lows from last December as the next potential line of support. This level represents a 10% drawdown from current levels.

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Originally posted 13th March, 2023