'A Run on Confidence' , an AI-generated image
On Monday 6 May 2024 5.15pm, I emailed Clients my latest post titled 'Oh wait, who remembers Silicon Valley Bank?'.
Below is the full transcript for your perusal:
'Dear Clients
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So many things to say, so little time! Let's kick off with the world's most important index, the S&P500 (aka SPX) and hopefully HK/Shanghai, Bitcoin & Gold in the next few weeks.
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The memo below is split into Technical notes and Macro notes. Clients who are less attuned to the use of technical analysis may skip straight to macro notes!
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S&P500 Index (SPX):
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On 29 Feb 2024, I said:
'..A good place to begin is for (S&P500 Index) price to break authoritatively the blue uptrend line that has been holding this steep rally since Oct 2023. Next will be the psychological round number of SPX 5000..'
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Mr Market has again obliged me very well recently with an April ~6% pullback. It broke the above-mentioned blue trendline channel holding the steep rally & SPX flirted with the psychological 5,000 level on a few occasions.
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So what's next?
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On a Technical note:
As we navigate through the current earnings season, it's crucial to anticipate what lies ahead beyond the current 'bounce' off the April pullback. Let's not forget we are entering the stock market's negative 6-months seasonality period from May to October.
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Now a deep dive into my favorite Fibonacci Retracement Tool offers valuable insights into potential pullback targets that could manifest over the next few months.
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Looking at the SPX from its October 2022 lows to its March 2024 highs, we identify significant retracement levels (see below Chart 1 blue dashed line set):
Chart 1 - S&P500 Index (SPX) dated 3 May 2024 (formidable support zones from two sets of Fibonacci Retracement on two time frames)
1) The common 38.2% retracement level sits at SPX 4587, aligning neatly with the resistance level of the bullish inverse Head & Shoulders pattern that emerged in December 2023.
This level now serves as a pivotal support zone due to the concept of Polarity, where past Resistance transforms into Support.
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2) Following closely, the next common 61.8% retracement level stands at SPX 4169, mirroring the original resistance level observed during the May 2023 breakout.
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3) Now, note that any sustained decline below the 71.8% retracement level at SPX 3871 could signal deeper concerns, potentially opening new probabilities of price action testing new lows not seen in two years.
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Now if we introduce another Fibonacci Retracement set (see above Chart 1 red colored set) from October 2023 lows to March 2024 highs, we aim to pinpoint areas of confluence for robust support for the Fibonacci Retracement Tool used in both time frames. Here are therefore the key zones of confluence combining both sets:
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4) The intersection of the blue 38.2% and red 61.8% levels presents a formidable support zone ranging from SPX 4587 to 4547 (pink support zone).
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5) Similarly, the overlap of the blue 61.8% and red 100% levels indicates a significant support area spanning from SPX 4169 to 4104 (purple support zone).
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In summary, it's prudent to monitor these critical support zones as the correction gains momentum. While it may be premature to act hastily, being aware of these support parameters equips us to navigate the evolving market landscape effectively.
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On a Macro note:
In March 2023, the US faced a regional banking crisis where several mid-sized banks, including Silicon Valley, Signature Bank, First Republic, and Silvergate, experienced significant difficulties. This was primarily due to a problem called 'duration mismatch'. Essentially, these banks struggled because customers withdrew their deposits in large numbers. Many of these customers were tech or crypto businesses needing funds to cover losses, while other customers simply moved their money to banks offering better savings rates. Additionally, said banks' profitability took a hit because raised interest rates had already weakened their balance sheets by reducing the value of their government bond holdings.
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Credit Suisse also collapsed due to what was believed to be contagion effects from this crisis. To counter the situation, the FED launched an emergency lending program in March 2023 called the Bank Term Funding Program (BTFP). BTFP was considered a success as it backstopped the bank run crisis. However, it was intended as a temporary emergency measure and will cease making new loans on March 11, 2024. The program has thus been closed for a month plus. See footnote source 1.
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Recently, on April 26, 2024, Republic First Bancorp failed and was acquired by Fulton Bank. Despite the existence of the FED's Discount Window, which is meant to provide troubled banks with similar emergency liquidity, Republic First Bancorp did not utilize it. The reasons behind this decision are not well-covered in the mainstream media, but IMHO regional banks' failure is probably one of the many potential issues that will haunt the FED & the US banking sector for some time to come. See footnote source 2.
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For the uninitiated, the current environment has seen 10-year bond yields rise to around 4.6%, compared to approximately 3.4% in early February 2023, just before the regional bank crisis. This major shift in rates within a span of 2 years is indeed a significant change from the low interest rate environment that prevailed for the past decade or so. As you may know, adjusting to higher interest rates will pose challenges for both the economy and the financial system, considering how accustomed corporate America has become to low rates.
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In addition, US small businesses are feeling the heat as sentiment surveys slide to the lowest level in more than 11 years and Q1 US GDP reported the week before shows a surprise slow down. Frankly, I'm not sure if the GDP slowdown was a surprise at all! See footnote source 3 & 4.
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Are these the very reasons what the FED foresaw & thus pivoted on 14 Dec 2023 in the first place?
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Lastly, inflation metrics (CPI) will eventually ease off in the next few months because one of the major and most sticky components of inflation 'Shelter / Rents' (comprising 30-40% of CPI) is already trending downwards but has a lag of average 9 months before showing up in the inflation numbers. See footnote source 5.
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In a nutshell, I'm arguing that the FED has a higher propensity to cut rates than not. Let's watch this space closely!
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Footnote source:
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In Layman's terms:
1. Technicals wise, I am defining the current rally in SPX as a rebound off the April selldown. Pls note I cannot rule out this 'rebound' can still reach for my original 29 Feb 2024 target at SPX 5,300+/-, see https://tinyurl.com/bullseyeagain. In Elliot Wave parlance, this is known as 'Expanded Flat' pattern.
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2. In this memo, I'm thus setting up what may be the potential support zones to watch out for should the correction ensue, given we have also entered the US stock market Negative Seasonality period between May to October. In other words, my bias is for the US stock market to come down in the next few months.
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3. Significant support zones as indicated by Fibonacci Retracement Tool are SPX 4587 to 4547 (pink support zone) & SPX 4169 to 4104 (purple support zone). Do make plans accordingly.
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4. Macro wise, is the recent failure of Republic First Bancorp a canary in the coal mine? Even if it is not so, I would like to argue that corporate America is simply not accustomed to a sustained high interest rate environment of 5% or so.
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5. Small businesses' confidence are often better indicators of economic conditions than your usual mega-caps and majors. The sentiment on this front is unfortunately not sweet.
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6. The key takeaway from the recent Fed meeting was 'cuts have been delayed, not derailed'. Frankly, I wonder if the FED can truly wait for the conditions to be on their side (easing inflation / employment / economy) before they announce the first cut OR will their hand be forced sooner by sustained economic weakness or by the proverbial 'black swan'? Well, never a dull day in macro.
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7. On a side note, Clients of mine who have onboard my curated Bond Portfolio continue to benefit from collecting a ~5.8%pa dividend payout (net of fees) on a monthly basis while literally waiting for the FED to announce the first cut. A $100,000 investment works out to be ~$483 paid out monthly, directly to clients' bank account.
An elegant fixed income product, at the right time, IMHO. DM me for more details.
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As usual, Live Long & Trade Well!
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Thank you & regards,
Thomas Ng, CMT
Principal Trading Representative
首席股票经纪
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Chart source: Tradingview'