The upcoming Federal Reserve meeting has been eagerly anticipated by investors as the central bank is widely expected to raise interest rates by 25 basis points. While this move is intended to combat high inflation, it will significantly impact the (already fragile) U.S. economy and have far-reaching implications for both businesses and consumers. One of the most significant impacts of the rate hike will be on debt servicing, which will become more expensive as interest rates rise. In addition to higher borrowing costs, the rate hike will contribute to slower economic growth, decreased consumer spending, and lower stock market returns. Moreover, this tightening of monetary conditions will come at a time when many U.S. regional banks are struggling to stay afloat, driven by a combination of factors, including loan defaults, capital outflows, and increased competition from larger banks.
The potential contagion of the regional banking crisis has become a more pressing concern in light of recent failures within the financial system. In the past two months alone, we have seen the collapse of Silicon Valley Bank and Signature Bank, followed by a bust of First Republic Bank last week. Then, this week, we already saw massive declines among other regional banks, including PacWest Bancorp (-27% yesterday), Western Alliance (-15% yesterday), Metropolitan Bank (-20% yesterday), HomeStreet Bank (-14% yesterday), Zions Bancorporation (-10% yesterday).
With these developments in the market, we would like to voice a word of caution to investors and once again reiterate our belief that we are merely going through a very deceptive bear market rally in market indices (rather than the raging bull market that so many people suggest). Accordingly, we remain bearish on the U.S. market and maintain a price target of $3500 for SPX.
Illustration 1.01 Illustration 1.01 shows the setup for SPX with the bearish trigger below Support 1 and tight stop-loss above it.
Technical analysis gauge Daily time frame = Neutral/Slightly bearish Weekly time frame = Neutral *The gauge does not necessarily indicate where the market will head. Instead, it reflects the constellation of RSI, MACD, Stochastic, DM+-, ADX, and moving averages.
Please feel free to express your ideas and thoughts in the comment section.
DISCLAIMER: This analysis is not intended to encourage any buying or selling of any particular securities. Furthermore, it should not be a basis for taking any trade action by an individual investor. Therefore, your own due diligence is highly advised before entering a trade.
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Following the Federal Reserve's decision to raise interest rates by 25 basis points at its FOMC meeting, the trading session was characterized by volatility and whipsaws. The decision, coupled with the Fed Chairman Jerome Powell's press release, led to significant uncertainty and anxiety among investors. However, the worst was yet to come. After the U.S. market closed, several regional banks crashed, confirming fears of a contagion effect within the sector. Just as we warned about regional bank contagion yesterday, things are getting much worse today. PacWest Bancorp dropped 48%, Western Alliance Bancorp fell 38%, Metropolitan Bank erased 12%, and Zions Bancorporation lost 10%.
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We will provide more thoughts on Jerome Powell's remarks during the press conference in a new article very soon.
Thank you. Good post. A “deceptive bear market rally” is about as accurate as it get. Nearly all the historical (and flawless) indicators have been flashing “recession” but in all fairness, we need one to finally end this Ponzi scheme, phony P/E ratios and all the derivatives propping up this giant casino. I’m not keen on losing the dollar, perhaps some creative way will be found to save it (like shoring up Treasuries to gold). On the ground however, the economy isn’t showing many signs of slowdown…very deceptive and confusing indeed.
Tradersweekly
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@Free_Loader, Thank you very much for your input. I agree.
n00b_trader420
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Makes total sense. Anyone who thinks otherwise is being fooled
Thanks again for this great detailed post. We now see that the markets are trying to stabilize or rather the calm before the storm. All eyes will be on the Fed today. While markets still expect the Fed to raise borrowing costs by 25 basis points at its meeting today, people are hoping for a sign of a change in course by the Fed possibly announcing an end, or at least a pause, in its aggressive rate hike cycle. Recent severe turmoil in the banking sector and sharp losses at regional U.S. banks may indeed prompt the Fed to provide a more cautious outlook but given inflationary pressures, the Fed will try to avoid signs of a dovish turn. I agree with you, and believe that overall, we remain in a bear market with stocks still overpriced.
Tradersweekly
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@AngelaCat, You are right. Everyone is waiting for the press release to hear what Jerome Powell has to say. Thank you very much for the comment.
averkie_skila
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@Tradersweekly, Please do an update on how you view the market's reaction to yesterday's words.