2023-03-12-SPX Trendline Analysis - Daily
The S&P500 ($SPX) fell 4.5% last week. The index ran into resistance at the trendline of "lower highs" on Monday, and found support at the trendline of "higher lows" on Friday.
The ADX moved to bearish on Thursday, as did the price and volume signal. During that session, the index sliced through the 50 and 200 day moving averages on higher than average trading volume.
Elliott Wave remains mixed, although probabilities now favor the bearish count. No change in key levels from last week (3765 and 4196).
2023-03-12 - SPX Elliott Wave Analysis - Daily - Primary Y (Bearish)
Looking at the bearish count, the Minor 2 correction (i.e. rally) ended on Monday, after retracing a bit more than 50% of Minor 1. The Minute waves received a slight adjustment to match prior corrective waves (i.e. Minor 2 & 4 had b-waves that undercut the end of impulse Waves 1 & 3)
2023-03-12 - SPX Elliott Wave Analysis - Daily - Primary 1 (Bullish)
Last week’s sell-off didn’t help the bullish viewpoint, which now requires a very rare pattern: the ending-expanding diagonal. It’s so rare, some practitioners don’t believe it exists! Even so, the SPX sits at the 78.6% retracement of the Minor 1 wave, which would be a good spot for a bullish rally to find support. Otherwise, the 3765 low is the last line of defense.
No one expects the inquisition! Except the Spanish, of course. That seems to be the case in the markets as well, with a seemingly no one expecting liquidity issues, except the people watching liquidity. After all, the Fed's rate hike program wasn't called "Operation Break S&!t" for nothing.
For those that don't know, issues in the financial sector sparked last week's sell-off. There are A LOT of passionate "why", "how", and "what now" opinions on social media. A lot. Some are well reasoned...others not so much. I'll try my best to summarize:
First, and less widely reported, Silvergate Bank ($SI) entered voluntary liquidation. This announcement came after inquiries from bank regulators and the Department of Justice on their role in the FTX blow-up. The company also delayed filing its annual 10-K report due to questions from its independent auditors and accounting firm over its figures. Silvergate was not on the FDIC's "failed bank" list, because it voluntarily liquidated in order to make full repayment of all deposits, rather than going into an FDIC receivership.
On the other hand, Silicon Valley Bank ($SIVB) began experiencing liquidity issues on Wednesday, and by Friday was in receivership, meaning the company couldn't meet financial obligations (i.e. insolvent) and is now being wound down by the FDIC.
A majority of SIVB's clients are start-ups and local businesses, not personal checking/savings accounts. These businesses used the bank for things like payroll accounts, expense accounts, etc.; accounts that are much larger than FDIC insurance levels, by the way. Those companies are impacted by higher costs and lower profit margins just like everyone else, resulting in more withdrawals than deposits. The bank reached a tipping point on Thursday, after a small number of large withdrawals in a matter of hours. Even after they sold a substantial amount of assets, they couldn't recover.
Going forward, the FDIC will make SIVBs depositors whole within the limits of the FDIC program. That's the reason for the program. The amounts over and above FDIC levels are uninsured and a point of contention. As stated by Ellen Chang of TheStreet:
"Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds," the agency said. "As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors."However the FDIC resolves those excess amounts, there's a high probability of financial stress and a scramble for cash over the next few days (like 2008), in a very small section of the economy (not like 2008).
Does all that mean there won't be another "surprise" corporate bankruptcy, credit event, or bank failure going forward? No! Those events happen in rate hiking cycles and/or recessions, and the U.S. economy is about to experience both at the same time, if we're not there already. Bed Bath and Beyond ($BBBY) is already on the verge of bankruptcy and winding down operations to conserve cash.
It DOES mean you can prepare yourself and your portfolio by re-evaluating risk/reward. For example, taking on more volatility for higher returns (i.e. "reaching for yield") is higher risk now that money market funds and U.S. treasuries providing more than 4% yield. Or you can make sure that all your accounts are within FDIC or SIPC limits (not advice, just for discussion).
Back to our regularly scheduled programming, the economic data released last week was mixed. January job openings (JOLTS) fell slightly compared to December, but were still better than expected. A similar story for the Non-Farm Payroll data released on Friday; February figures were higher than expected, but unemployment rose slightly (0.2%) and wages increased less than expected.
This week's economic data includes the February's Consumer Price Index (CPI) on Tuesday and Producer Price Index (PPI) on Wednesday.
Best To Your Week!
P.S. If you find this research helpful, please tell a friend.
If you don't, tell an enemy.
Sources: Bloomberg, CNBC, Federal Reserve Bank of St. Louis, Hedgeye, U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics
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