Last Friday JPMorgan Chase upgrade three regional banks and combined with better than feared earnings report from Apple the night before, the market took off as if all ills in the banking sector were fixed.  PacWest bank rallied 81.70% on Friday.  Nothing fundamentally changed about PacWest overnight, no one wanted hold the PacWest stock into the weekend.  Therefore the short squeeze pumped up the stock by a nice 81.90% in one day.

Over the weekend, Mr. Warren Buffett stated that he expects issues in the banking sector could continue, but he said depositors shouldn’t to worry about their money.  Buffett said there should be “punishment” for the directors and executives responsible for any mismanagement at the banks. However, he noted that depositors could rest assured that their money is secure, given the government backstop.  The implicit government guarantee of all bank deposits is why we don’t have a full blown banking crisis.  But the fleeing bank deposits from all banks to higher interest paying short term T-bills  will add continuous pressure to the banking system unless the Fed lowers the interest rate.  Right now the 3-month Treasury Bill rate is at 5.10%.  Why wouldn’t anyone park their money in the short-term T-bills risk free?  Of course, that’s exactly what is happening with all bank deposits.  The bleeding bank deposits are the real problem for the economy and the Fed.  Eventually the Fed will be forced to cut interest rate because some trouble bigger than the three failed regional banks shows up unannounced.  When the Fed weaponizes interest rate to fight inflation, the Fed is going to misfire and cause bigger problems than intended.

Traditionally the stock market rallies 9 months between the rate pause and the first rate cut.  The market is anticipating the Fed to pause in June.  Will the market take off from here in anticipation of a rate pause in June?

During last Thursday selloff, both the DOW and S&P 500 took out 4/25/23 low, but the NASDAQ didn’t.

The DOW and S&P 500 created a structure that is implicating the rally from mid October 2022 low is concluded.  It has been 7 months since the mid October 2022 low, so it is right within the seasonal timing band for the market to turn down from here.

The DOW and S&P 500 both made an outside week already, but the strong weekly close negated the impact of the outside reversal bar.  The NASDAQ had a very strong weekly close as well.

Right now the market is still trading below its February 2023 high.  After Apple earnings inspired rally, what would be the next catalyst to carry the market over February 2023 high?  We don’t see any positive catalysts, except the debt ceiling fight and regional banking crisis which are all negative.

We wouldn’t be surprised to see that Friday’s rally could be the ultimate bull trap down the road.

Microsoft, Apple and Meta all took out their perspective February 2023 high, while Google and Amazon didn’t.  Microsoft, Meta and Apple are definitely winners in 2023.

Google is being penalized for its lag in AI against Microsoft and Amazon is being penalized for Covid related expansion expenses.

The XLF/SPY chart is showing the banking sector performance against the S&P 500 is near crisis-era threshold.  The Fed never raised rates during a crisis, so this time is DIFFERENT!  The 25 basis point raise adds more pressure to the banking system.  And the Fed’s motto is to hold higher rates for longer.  Just like the opposite of what they did in prior cycle lower rates for longer.

Below is a long term XLF/SPY ration chart.

With the bank stocks in such dismal state, a bull market just can’t take off without the bank stocks participating.  We believe fundamentally this market can’t break out the February 23 high and continue to rally.

Even though we had a super bullish Friday, but one day’s trading can’t change the trend.  On Sunday, the Treasury secretary Janet Yellen spoke about the unthinkable disaster if the government can’t raise the debt ceiling.  There will be plenty of bearish talk surrounding the debt ceiling fight which will drag the market down.

Technically, the market is at a double top with 7 weeks into the current weekly cycle.  It also has been 7 months since the seasonal mid October 2022.  Those two timing bands can help in making the decision to call the double top plausible.  It could take some time to break down, but the upside potential is limited at this point.

Below is the S&P 500 weekly chart.  It is 7 weeks into the current weekly cycle.  It is in a potential top timing band, in other words, if it is turns down from here, it is within the cycle timing band.  We still believe the selloff from here will be mild and the mid October 2022 low will hold.  We will continue to sell covered calls.