Image source: Elon Musk's twitter account in response to Silicon Valley Bank (SVB) failure
On Sunday 12 Mar 2023 11.34pm, I emailed Clients my latest post titled 'But the news now is so bad that it's good'.
Below is the full transcript for your perusal:
'Dear Clients
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A bit technical tonight, pls bear with me! Do note the S&P500 Index is also affectionately known as SPX.
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It's textbook stuff
In my 3 Feb's writeup, the title of the post was 'Am I stating the obvious? Risk is on!'
I also mentioned about a potential bullish chart pattern for the SPX with an implied target of ~4440, should price action break out authoritatively. (Ref https://tinyurl.com/riskison)
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The title was apt as it points to the weakening of that trio numbers back in Jan 2023 that I watched keenly:
1) downtrending Dollar Index (aka USD),
2) downtrending 10-year bond yields (aka TNX) and
3) weak inflation numbers (CPI, etc).
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Their weakness immediately implies a RISK ON environment, as explained in my previous writeups before. (Ref https://tinyurl.com/expectweakness)
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Coming into Feb & March, obviously we saw no lack of headline news that just spells pessimism. Lest I become the next Jim Cramer of Singapore, let me explain that my bullish bias is built upon the 61.8% retracement level between 2022 SPX Jan high & Oct low which points to SPX 4312.
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You see, the 61.8% Fibonacci Retracement level for the S&P500 Index (SPX) is & has been a natural price magnet for a rebound wave or the more commonly known term 'dead cat bounce'. Mr Market doesn't always have to reach the 61.8% when price retraces but it routinely does; and often exceeds. In fact, many times rebound waves in SPX are likely to reach the 61.8% to 78.6% retracement levels which in our case, corresponds to the SPX 4312 - 4535 zone.
My bullish pattern implied target of 4440, as mentioned above, was right smack in the zone. In other words, if Oct 2022 low was indeed the bottom for this correction, them I expect SPX to at least touch the 61.8% retracement level in a rebound wave. This is pretty much textbook stuff, actually. (see Chart 1 below)
Chart 1 - S&P500 Index (SPX) Daily Chart, 18-mth
Invalidation
In the same 3 Feb 2023 post, I wrote: 'If we see a sustained breakout roughly above the 4105 level, then we should look forward to a bullish (purple) Cup & Handle Pattern implied target of 4440+/-. Of course, as usual the backtest must hold, ie price action going forward should not break back BELOW the bold red downtrend line.
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With FED's hawkish tone on Tuesday 7/3 & SVB's failure the main headline news this weekend, the probability of price action entering into that bold red downtrend line (or 2022 downtrend channel) is high, ie the backtest may not hold.
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If price does break further down in a sustained way in the coming week, the immediate bullish potential for SPX will be invalidated. We will then need to reassess again how the next bullish pattern may shape up. However, to be clear, i stand by my view that SPX 4312 remains a strong price magnet to be reached likely in the future (provided no new SPX lows is recorded; as it will recalibrate the Fibonacci Retracement levels).
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But the news now is so bad that it's good
Macro wise, with the failure of SVB who is a victim of sustained rising interest rates, the issue of confidence & systemic risk appears to have creep in. As you may know, Confidence is that key word that makes the world go round in financial markets. The fear out there now in the marketplace is which other US regional bank has the same duration liability mismatch (also known as poor interest rate risks management) and which other listed mid-cap Tech stocks has cash held in SVB?
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Make no mistake, the FED may now have to step in and back-stop this confidence crisis and may have to weigh carefully if they are to 'take back' their Tuesday 7/3 signalling for that potential 50bp rate hike come 22 March FOMC meeting.
In fact, the Bond Market has spoken on Friday night 10/3 which seasoned investors may have already noticed the sharp drop across all bond yield maturities on close:
. 2-year bond yields - down 5.8%
10-year bond yields - down 5.8% 20-year bond yields - down 3.9% 30-year bond yields - down 3.7% TLT bond ETF - up 3.45% . Further, inter-market analysis also reflects the usual FIAT hedges have caught a bid: Gold ETF - up 2.16% Bitcoin - up 5.14% versus DXY (USD index aka USD vs basket of majors) - down 0.6% . .
Conclusion in Layman's terms:
1. Between SPX high & low points of 2022, SPX 4311 is a natural price magnet for a rebound wave as it is the 61.8% Fibonacci Retracement level. Mr Market doesn't always have to reach the 61.8% level when price retraces but it commonly does; and often exceeds. This rationalizes the short-term bullish bias of my previous post.
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More info on Fibonacci Retracement levels for financial markets, if you are keen: https://www.investopedia.com/terms/f/fibonacciretracement.asp .
2. Back in late 2021 where inflation numbers were already rearing its ugly head for a few months running, the FED calls it 'transitory'. Today, one month's worth of above-expectations inflation numbers (Jan inflation numbers reported on 14 Feb 2023) has Powell slamming down his fist on Tuesday 7/3 calling for 'interest rates are likely to be higher than previously anticipated'. Wow, surely I can expect better, Mr Chairman!
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3. If SPX price action broke down into the 2022 red downtrend channel in a sustained way, the immediate bullish potential will be invalidated & we will then need to reassess again how the next bullish pattern may shape up.
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4. 20+ years of low interest rates cycle has too many financial and corporate actors behaving in an entrenched way that are definitely not suited to a rising interests rate environment. SVB could just be one of many that are hiding in the US financial markets.
With possible bank run contagion, will the FED's hand be forced to pause a bit and release some liquidity back into the system? If it does, it can probably kick the 'can' further down the road again and save the world yet for another day..
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Same FED playbook? Yes
Same moral hazard? Absolutely
Will this be the next time bomb? It will work until it cant, so yes very likely
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Interesting weeks ahead! As this space will evolve rather quickly, do drop me a line for updated insights.
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Now while waiting for investment opportunities to manifest, Clients with excess funds looking for good yields BUT do not want to be locked up with T-bills or Fixed Deposits may wish to consider Phillip Smart Park which is a SGD & USD money market fund. . The Phillip Money Market funds for SGD & USD is yielding 3.16% pa & 4.32% pa respectively.**
. **Rates updated as of 06 March 2023. Based on the average rate of annualised returns over the last rolling week. Past performance is not necessarily indicative of future performance.
. More info on Smart Park here & below: https://smart.poems.com.sg/smartpark . As usual, Live Long & Trade Well! . Thank you & regards . Thomas Ng, CMT Principal Trading Representative 首席股票经纪 www.thom-ng.com . #plsreaddisclaimer #chartforillustrationonly #spx12mar23 #SVB #sobaditsgood #marketwillforcefedshand #befluid #wytant #livelongandtradewell Chart source: tradingview
Image source: Elon Musk's twitter'
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