Here’s what’s in store for the stock market this week after last week’s bank collapses, bank runs, and financial sector collapse. Now that we’ve made it through the weekend without the banking crisis getting worse and without any more banks failing, all eyes are turning to the Federal Reserve to see what they’re going to announce not only for interest rate hikes, but also for future interest rate expectations in their Summary of Economic Projections.
Last Week Recap
After the collapse of Silicon Valley Bank and then Signature Bank two days later, there was massive fear about the possibility of a 2008 financial crisis starting again. Those fears spread as First Republic Bank required a bailout from 11 other banks in the amount of $30 billion, and Credit Suisse also faced bankruptcy. Then on Sunday it was announced that UBS would buy out Credit Suisse, allowing them to avoid bankruptcy through both a $3 billion buyout deal and a $100 billion cash infusion from the Swiss National Bank. As a result of the bailouts and buyouts, fears of more banks failing are starting to subside, which could cause the stock market to rise this week.
The fear and greed index (https://www.cnn.com/markets/fear-and-greed) fell slightly from 28 to 25 last week as bank fears continued. It will still take anywhere from a few weeks to a few months before bank stocks get back to normal and start to recover their losses from the past week, which means the market will most likely remain in the fear stage for the next two weeks. Expect market participants to remain on edge about the possibility of more bank failures, while also being concerned about what the Fed will do on Wednesday. Don’t expect any major bullishness until Thursday at the earliest, if we get any at all.
The VIX fluctuated wildly last week, but ended the week mostly flat. Historically the 2nd week after the VIX MACD receives a golden cross is the week the VIX maxes out. So based upon history, the VIX should slowly start to recede as fear around the banking sector slowly starts to recede as well.
Last week saw vastly different performance between the major indices. The NASDAQ rose almost 6% while the Russell 2000 fell almost 3%. I can’t remember the last time we saw such a stark difference between the indices. As a result, the technicals are now vastly different depending upon which index you look at. The DOW, S&P, and Russell are all 100% bearish with the candles below both the 10 and 21 day EMAs, the MACD having formed a death cross, and the RSI below 50. Meanwhile the NASDAQ is 100% bullish with the candles above all of the EMAs, the MACD having formed a golden cross, and the RSI above 50. This is because right now, the technicals don’t matter as we remain in a news-driven market. The NASDAQ also got a boost from mega-cap tech stocks as money flowed out of banks and into tech.
The weekly charts are just as mixed as the daily charts. The DOW is mostly bearish and is on the edge of turning extremely bearish, while the S&P is fairly neutral, the NASDAQ is 100% bullish, and the Russell 2000 is 100% bearish.
After the havoc last week in the banking sector, UBS agreed to buy Credit Suisse on Sunday for $3 billion. You can see the full terms of the deal and how it will affect US bank stocks here: https://youtu.be/BEZxq5hMG8c. The deal should help quell some of the fears in the banking sector, but as bank runs continue, be on the lookout for any signs of more bank failures this week.
On Tuesday and Wednesday the Federal Reserve will hold their March FOMC meeting, and they are widely expected to either raise rates by 0.25% or pause their rate hikes. If they pause, it could indicate they are fearful about the banking sector, which could cause more bank runs and more bank stocks to fall. But if they raise by 0.25%, that would indicate that they feel the banking sector is fine, and that they can continue to fight inflation.
As the Fed interest rate hike decision is announced Wednesday at 2pm, the news will also include an updated Summary of Economic Projections (SEP). After the bank collapses last week, there is a lot of uncertainty around how much the Fed will raise interest rates before pausing, how long they’ll keep rates elevated, and whether or not they’ll cut rates this year. The SEP will give the markets clarity and insight into the Fed’s plans, and depending upon what they indicate, they could cause the market to either rally or crash. So on Wednesday, the actual interest rate hike won’t really matter. What will be important is the SEP and what Jerome Powell says during the press conference at 2:30pm Eastern Time on Wednesday.
Here’s the full list of all of the economic news coming out this week as well as the time each report is being released: https://www.marketwatch.com/economy-politics/calendar
Here’s what time each Fed member is speaking this week: https://www.federalreserve.gov/newsevents/calendar.htm
While the official earnings season is now over, there are still a few companies reporting this week that you might be interested in. The most notable of these companies are Pinduoduo and Foot Locker on Monday, Tencent Music Entertainment, Nike, and GameStop on Tuesday, Petco, Chewy, and KB homes on Wednesday, Accenture, General Mills, and Darden Restaurants on Thursday, and Express on Friday.
Other Things to Know
While bank stocks sold off last week, their earnings outlooks remained the same. There are now a number of bank stocks that might be undervalued and good buys. I included 15 bank stocks to buy in Sunday night’s video here: https://youtu.be/BEZxq5hMG8c.
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Wishing you the best of success trading this week,