The Banking Turmoil Spreads: Updated Buy Regions For Key High-Quality Stocks/Themes Impacted by The Crisis
Objective Technical Analysis & Key Levels Strategy on U.S Financials Stocks + Brief China Commentary (Thoughtful Preview Provided)
Note: This Strategy note will serve to be the series of updates I planned to send out to capture my research thinking for March’s mid-month note.
If you missed my previous note on investor psychology, feel free read it now. No amount of research & strategy will offset improper emotional decision making.
My methodology is considered to be Intermediate-Term Investing. Please read this here to understand what that means.
Due to me writing more frequent notes to help out the good members, my notes have to be briefer and extremely concise due to time constraints (so that I can send out info before the next trading day).
Since I last wrote to you on Sunday March 12th, a couple of additional events have occurred in the markets.
The first is obviously the Credit Suisse event. I’m not going to go over the news as that is now all over the mainstream media. What I did share publicly on Twitter earlier today was that I didn’t think this was going to be the event that Sells the SPX off into mass hysteria and fear. At least not for today.
The second, and this is the one that most people may not have yet caught, is the subtle rotation happening in markets within cross-asset classes such as Currencies, Bond Yields, and Precious Metals.
Point #2 is what this concise note will be about today - to understand the implications of inter-market data on how it impacts the market’s risk/reward.
I will also be discussing key Financials stocks that I believe are within tradable regions for tactical entries/exits.
I’m not going to talk about Point #1. All that is public information at this point.
Before we do so, a quick recap of what I’ve shared recently in terms of my personal journaling shared here, which also happens to be highly similar to how I personally position.
This past weekend, we discussed expectations for a brief tactical bounce in SPY ETF (S&P 500 ETF) at 386 for a bounce into the 390+ region before further weakness.
AXP for a tactical bounce at 158. That has since happened as we saw a bounce into 164 before retracing due to the Credit Suisse narrative.
Remember that what I can do is I can identify potential levels where prices react. What is impossible is to determine how long that bounce will stick. Some transactions must be Sniped.
Charles Schwab for a tactical bounce at 49. The name has received positive sell-side and corporate management support and has rallied back to 59.
The market dislocation in Schwab was mended by traders/investors in the span of just 1-2 trading sessions. This is why being nimble is so important.
Unless I mention that I don’t believe in specific past ideas anymore, assume that I still hold the view as shared at that time.
If I had one word to describe the market at this moment in time, I would use the word: Apprehensive
My mission here is to help you find unique opportunities as they appear, but understand that I am focusing on high-quality opportunities.
This is why I haven’t provided guidance on names such as First Republic, PacWest, or the other regionals.
From my experience running an Investment Community, I’m nearly certain that the volatility in these names make them unsuitable for 99% of my readers - except for those who trade full time and are able to spend the whole day monitoring price action.
The problem with those names is that traders/investors don’t have any “edge” where they can stack probability on their side. The gaps are too large, and don’t respect traditional fundamental and technical analysis.
The larger banks do respect fundamental and technical analysis. The opportunity is in the more stable banks and financial stocks where you can stack probability and clear zones in your favor, NOT the high-octane regionals in my opinion.
And that is what I’ll be talking about in this note: let’s get into a very concise, efficient discussion of key names, key levels, and opportunities that I am watching for opportunistic purchases.
At the end, I will also very briefly discuss a potential catalyst for China - a sector where I believe reward now outweighs risk given a long enough time horizon.
First, Let’s Discuss Inter-market Data in conjunction with Macro Info
SVB and Credit Suisse have temporarily taken Investors’ attention off macro datapoints, but the importance of those economic figures will soon resume its weight across media narratives.
Let’s look at the inter-market data and its reaction to the confluence of 6% Inflation CPI in conjunction with the latest jitters surrounding banks. This allows us to understand the big picture.
Afterwards, we will talk stock-selection and key levels.
The 2Y Yield is now back at 3.9%
The Terminal Fed Funds Rate Expectations is now 3.82%
The U.S. Dollar Index is now 104.7
Oil has fallen to 68
Gold (GLD) is now at 178
Here’s what I think about these macro data points in conjunction with recent events:
I don’t believe SVB and Credit Suisse are going to be catalysts that will bring down any of the Big Banks in the U.S. In other words, certain financial institutions are approaching levels of tactical bounce opportunities (discussed further below)
I think the Fed Funds Rates expectations to be cut down to 3.8% is too hopeful (FFR is now at mid-upper 4%). I do not believe the Fed will cut rates unless one of two things happen.
Headline Inflation CPI comes down to the 4% region or better
Unemployment rate goes up to at least 4.5% or higher
In terms of good news, I do think that the latest banking crisis has potentially saved the market from seeing 6%+ interest rates. With Inflation CPI now at 6%, I see a far weakened case to lift Fed Funds Rates to 6% or higher. This will later help equities down the road - although I still do think the Fed lets rates stay higher for longer.
I believe that Oil’s dramatic rout is close to finding a near-term bottom. Any revisit to 60-62 would compel me to add onto my XLE ETF Position, as I do not believe Oil will stay below 70/bbl by year end due to China’s reopening.
Long-time members will recall back in January that I liked the U.S. Dollar Index and its ETF (UUP ETF) when the Dollar was at 101 and the ETF was at 27.5. Now 104.5 and 28.5, respectively. This has since played out. However, at least for now, I am not in the camp that the Dollar will revisit levels such as 110 or higher. I see it being contained between 105 and 110, which is a region that may slow down a SPX recovery but is not the single catalyst that drives it significantly lower.
Gold and the Dollar are both heading higher, which is unusual. This means there is a flight to safety in both the Global Reserve Currency and the Precious Metal. Looking out longer-term, I think Gold will appreciate relative to the dollar. However, in the near-term, I do think GLD sees resistance closer to 181. We discussed our liking for GLD as we believed a 180 test was possible when it was at 172.
Given that my view is that SVB and Credit Suisse are overblown narratives (this is my personal opinion), I see opportunity in the following names that are potential candidates for trading a tactical bounces.
Due to the uncertainty of the environment we’re in, I will do my best to help our members to find tactical wins. But I don’t think it’s safe yet to treat Financials as “buy and hold” investments. I am prioritizing certainty over size of profits at the moment.
So, here’s my tactical list of U.S. Banks that I believe could offer present 3-6% returns with a holding period of a couple days to several weeks if you wait for the ideal objective levels to come to you. This list does requires one to be nimble. Position sizing should also be appropriate relative to the risk tolerance.
Until the macro environment heals, these are purely bounce ideas and not long-term investments. The terms I use below called “minor” and “major” support are my personal views of where levels might react stronger to selling/buying pressure.
As mentioned in previous notes, I think GS is one of the strongest investment banks in the U.S. (and the world). I believe 300 is a first tranche entry at minor support, and 280 is a second tranche entry at major support where a bounce has a higher chance of being more durable than the first.
Minor Support: At 300, return potential is about 3-5%
Major Support: At 280, return potential is about 5-8%
If there is a sharp daily close beneath 280, exercise extreme caution.
Similar to GS, I believe MS has a business model that will survive this recent bout of macro fragility. I believe a visit to 75 support is an opportunistic region for a tradable bounce. Possibly long-term holdings, dependent on market conditions.
Minor support: MS is now at this level at 85. Return potential is about 3-5%
Major support: 75. Return potential is about 6-10%
JPM is already at minor support as of today at 128, which is where a tradable bounce may occur if markets stabilize. A revisit to 120, would potentially draw me in as a longer-term investor in the name. I don’t have JPM at the moment.
Major Support: 120. Return potential of 5-10%.
American Express: American express bounced off my marked 158 support level twice. A third violation of 158 means that I believe the name may drift lower until sentiment stabilizes.
However, AXP is not likely to succumb to other banking pressures, and any irrational movement down to 137-142 is a very strong high conviction Buy in my opinion. At that level, AXP deserves a long-term spot in a well diversified portfolio. Return potential from that region looking out 12-18 months is about 20-30% (or more).
Members who were able to take advantage of Charles Schwab at 49 can either hold long-term or if they wish to trade the name can look for regions of resistance around 65-68 (another 10% upside from here).
Interactive Brokers (IBKR)
IBKR is a premier brokerage firm which I do not believe will be structurally impacted by SVB or Credit Suisse.
IBKR at 70 is a region of initial interest for me. I’m personally going to be a a Strong Buyer at 60. Now 76. I like IBKR’s business model enough to be a long-term shareholder at 60 if required.
Minor support: 70. Return potential is 5-8%
Major support: 60. Return potential is 15-20%
State Street (STT)
State Street is a custodian bank, and I do not believe its business has the same level of risk (or anything close) to that of SVB of Credit Suisse. Upon firmer market conditions, STT is already at a tradable bounce region today at 73.
Longer-term investors can wait for 65.
Minor support: 73. Return potential is about 5-8%
Major support: 65. Return potential is about 10-15% (looking out longer-term)
As you can see, the banks I’ve chosen above are the highest quality banks current in the market. Those are the only ones I’m looking at.
I do not have any opinion on regionals or European banks.
And no, we should not be buying any dip in Credit Suisse. 😂. There’s just no fundamental case to be made for it.
Upcoming catalysts for China
I want to make a very quick note on China before wrapping up. Tomorrow March 16th is the unveiling of Baidu’s Ernie AI Bot (their answer to ChatGPT).
I do believe that AI has the support of the Chinese government. Baidu will have a first mover advantage in creating these AI Chat Bots. Alibaba and Tencent will make their AI chat products later this year.
Generally speaking, I think China now looks good from a valuation and price level standpoint, and I am now actively accumulating names across the internet sector. I embrace further weakness as these valuations are levels that I do not think will last all year in 2023 given that I think the reopening in China will help them meet or beat their GDP targets.
It is impossible to catch the bottom, but absent a full blown U.S. - China war, I believe the reopening narrative and the improving Chinese consumer backdrop will slowly rebuild investor confidence.
If there is disappointment to Baidu’s release, I think any dip in the name or the sector in general will eventually get supported. AI is a growing market, and the secular trend is positive.
To monitor the sentiment of China ahead of tomorrow, you can go on Interactive Brokers or Trading View and put the following HK-Listed tickers on your watchlist:
What happens in Hong Kong usually has follow through to what happens the next trading day in the U.S.
Will have more thoughts on Macro, Fundamentals, and Geopolitics in future notes next week as March FOMC comes around. Wanted to keep this as concise as possible given time constraints.
Please make sure to read my 4-6 previous letters to understand my fundamental/macro views. This note was primarily technical analysis. I write quite frequently now so make sure to read many of my previous editions, which often also include valuable educational content to help you grow as an investor/trader.
Tell friends and family about the work we do - I appreciate you.
Hi Larry, long term China valuations are indeed attractive, but how does a US recession weigh into this assessment? Would a recession (which I think is highly likely in 2H23 or sooner) kill the China recovery story, or do you think China's reemergence from Covid is a secular trend & will continue despite a US/EU recession? WOuld you concentrate on the KWEB names, or do you think it will be broad based? Thanks!!!