Vlad's Best Bank Bust Trade
Welcome to this week's Power Trading and Markets newsletter, where we provide you with the latest updates and insights on the current financial landscape, as well as sectors and stocks that I believe are showing a lot of potential! But first, something a little more personal - and then we can discuss my view on the market.
At my latest book club meeting, we discussed Malcolm Gladwell's book "Talking to Strangers," which explores the topic of how, as a society, we tend to default to truth and transparency even when faced with concrete evidence that suggests otherwise.
Gladwell delves into various real-life examples, including the Bernie Madoff scam, where analysts failed to recognize the discrepancies between expected and actual returns. As many of you may already know, Madoff defrauded investors of billions of dollars by telling his investors that he was using a simple strategy of covered calls. However, few analysts could understand how Madoff was able to achieve such astonishing returns. It was later discovered that Madoff had been involved in a massive Ponzi scheme that spanned decades.
What is even more alarming, however, is the fact that despite several attempts by an analyst to report his findings to authorities, he was ignored. This highlights how our biases and blind faith can lead to catastrophic consequences for individuals and the economy as a whole.
The book discusses the concept of cognitive dissonance, which refers to the mental discomfort one experiences when holding conflicting beliefs or ideas. In the context of finance, cognitive dissonance can lead investors to overlook warning signs, resulting in significant losses.
As we navigate the current financial landscape, it is crucial to stay vigilant and keep an open mind to the credibility of certain stock and market trends. We are witnessing credit issues, liquidity issues, and declines in oil and silver prices.
Contrary to the economic turbulence, bullish predictions remain and investors are rushing to acquire big tech stocks such as Microsoft. Conditions have only aggravated: with liquidity problems, a decrease in silver rates (as compared to gold coming close to $2,0000 an ounce), and oil dropping below $60 per barrel – yet this week, NFLX was upgraded and given a target of $400! Even as the financial system is shaking to its core, people still highly value MSFT shares.
In times like these, it is essential to consider all the evidence and stay skeptical. Blind faith can lead to disastrous outcomes, and it is up to us to recognize our biases and take steps to address them. As we move forward, we must keep in mind the lessons of the past and stay vigilant. Let us not be blinded by our biases and keep an open mind.
Conversations like these are what we strive for in our weekly webinars. Connecting the fundamentals of technical analysis with current market conditions and additional insights is what sets YellowTunnel apart from the rest. Not only do I bring a personal touch, combined with top-of-the-line A.I., but also key psychological pillars.
Our community is designed to provide you with a unique trading experience where you can benefit from our A.I. trading program and learn while looking over my shoulder.
YellowTunnel provides a 30-day risk-free trial for all of our memberships. They give you full access to our platform and allow you to explore different trading strategies. You can test out our predictive software and trade intelligence platform and see for yourself the accuracy of our signals and the power of our trading tools. Our community is designed to provide you with the support and guidance you need to become a successful trader.
For more information on the YellowTunnel tools and our trading community, I suggest reviewing our latest Strategy Roundtable, which we hold weekly on YellowTunnel. I also recommend checking out our latest Roundtable webinar in its entirety below:
How To Trade a Bear Market Strategy
With the unpredictable nature of the market and the uncertainty ahead of us, I can’t emphasize enough how vital it is for our readers and members of the Yellow Tunnel community to keep referring to our Live Trading Room so as to maintain a close tie of how our I and my AI platform is navigating us in and out of select trades. It’s FREE and I highly encourage everyone to sign up to the Live Trading Room and keep checking in throughout the trading day.
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I also want to emphasize to traders how vital a stop-loss discipline is to winning and being successful in an unforgiving market. We employ specific stop-loss instructions with every trade. The buy and sell programs controlled by high-frequency related algorithms can create great profits or cause sudden losses, so it is imperative to maintain an element of controlling risk with each trade.
CURRENT TRADING LANDSCAPE
The stock market witnessed a decline on Friday as the previous day's rally fizzled out due to concerns about the banking sector's health. Yields on the US 10-year Treasury note dropped to 3.417%, continuing its downward trend for two consecutive weeks, slipping from 3.57% on Thursday afternoon. Credit Suisse experienced another setback, with shares falling 8.2%, and American depository receipts dropping 5.3%.
SVB Financial Group announced on Friday that it had filed for Chapter 11 bankruptcy protection in New York. While in an attempt to bolster confidence in the banking system, a crew of banks agreed to deposit $30 billion with First Republic. However, First Republic shares plummeted by over 20% on Friday after the lender suspended its dividend.
Today was also the release of another key economic report that further illuminated the latest market conditions. The uncertain economic climate has had a negative impact on consumers, resulting in the Index of Consumer Sentiment dropping to 63.4 in March from 67.7, representing the first decline in four months. Markets did see some positivity in the middle of the week, which was quickly diminished today.
The major US indices showed a positive trend on Thursday, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all rising as shares of regional banks stabilized after a week of tumultuous trading following the collapse of Silicon Valley Bank. However, concerns about the impact of higher interest rates on the banking sector have led market watchers to adjust their expectations for the future path of monetary policy.
J.P. Morgan Chase and Morgan Stanley are reportedly in talks about a possible deal with the struggling bank First Republic, which may involve an influx of capital. Credit Suisse announced that it would borrow up to 50 billion Swiss francs from the Swiss central bank after plunging to all-time lows on Wednesday when its top shareholder stated that it would not invest more money.
In addition, Goldman Sachs lowered its US annual growth forecast for the fourth quarter of 2023 by 0.3 percentage points to 1.2%, attributed to a likely tightening of lending by small and medium-sized banks. Key economic reports continue to dictate the market this week. Initial jobless claims fell to 192,000 for the week ended March 11, while housing starts rose 9.8% to a seasonally adjusted annual rate of about 1.45 million in February. However, retail sales tumbled in February, declining by 0.4%, with pullbacks in spending seen across various categories.
These developments have significant implications for the Federal Reserve, which has increased interest rates eight times to combat historically high inflation and slow down the economy. Concerns surrounding the banking sector and the fall in retail sales suggest a potential slowdown in the economy and the possibility of a recession. If this scenario materializes, the Federal Reserve may pause its interest rate hikes.
With financial markets having experienced a great deal of unpredictability and volatility during these times I have noticed an alarming trend: The DXY has been strengthening while the 2-year yield has been dropping at an unprecedented rate, something that is comparable only to Black Monday in Oct 1987.
Despite this, there is still a disconnect between the bond market, currency market, and equity market, and it remains to be seen whether the stock market will follow the precipitous drop in the 2-year yield or vice versa. As the market continues to pull back, more volatility is expected during the first half of this year.
The recent sell-offs of SVB, CS, and Signature banks are a cause for concern as they indicate liquidity issues in credit markets. Credit default swaps have also widened across different credit structures, while a lack of liquidity in treasuries and historical moves in the 2-year treasury point to credit issues and a high probability of recession. Fed futures now point to a 100 bp rate drop by the end of the year, and the Fed is likely to pause sooner than expected. The ECB and Fed will speak next week, setting the tone for the rest of the year.
Sales numbers returned weaker than expected, and the CPI report was worse than expected, while the PPI was better than expected. With this, the narrative has changed from a Soft Landing/No Landing to a Hard Landing in accordance with standard correlations between the treasury market and equity market. Having said that, the previous reverse mantra has changed, and now the bad news is bad for the market, whereas good news is good for the market going forward — unlike the past 15 months.
I would be market BEARISH going into the summer until the next earnings season starts in late April and May. Equity markets will be volatile, and the best-case scenario is that the market will reach the bottom in the first half of the year. The main reason is that S&P 500 revenue numbers will most likely have to be revised down, which is not factored into the current market levels. While there may be a relief rally, I believe the bear market will continue this year.
Looking at the latest market conditions, I have identified a sector that I like for the next few weeks. Let's review some of our A.I. data before we break it down. I am watching the overhead resistance levels in the SPY, which are presently at $392 and then $402. The SPY support is at $380 and then $372. Furthermore, I expect the market to trade sideways for the next two to eight weeks. See $SPY Seasonal Chart:
The VIX has spiked up to the $30 level. This week, the FDX and LEN earnings, along with liquidity issues in regional and global banks and PPI data, have significantly influenced the market. Next week, watch out for the latest Federal Open Market Committee meeting taking place, with Powell speaking to the press afterward. Finally, PMI data will wrap up the week, with two reports on Friday.
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SECTOR SPOTLIGHT
As market uncertainty and volatility continue to make headlines, many investors are looking for ways to protect their portfolios and potentially profit from market downturns. One ETF that has caught my attention during these turbulent times is a financial sector fund with a unique twist. This ETF is designed to deliver three times the inverse performance of a well-known financial services index, offering potential ways for investors to profit from market volatility. With its leveraged exposure to the financial services sector, this ETF may be a wise move for those seeking a defensive position in their portfolios.
The Direxion Daily Financial Bear 3X Shares (FAZ) is an exchange-traded fund that aims to provide three times the inverse daily performance of the Russell 1000 Financial Services Index. In other words, if the financial services sector of the market goes down, FAZ is designed to go up by a factor of three.
FAS is managed by Direxion, a leading provider of leveraged and inverse ETFs. The fund was launched in 2008, just before the global financial crisis, and quickly gained popularity as investors sought ways to profit from the market downturn.
FAZ utilizes a combination of financial derivatives, such as futures contracts and swap agreements, to achieve its investment objective. As a leveraged ETF, it is designed for short-term trading rather than long-term investing. The fund is rebalanced daily, which implies its exposure to the underlying index is reset each day.
Overall, FAZ is a unique and powerful tool for investors who believe that the financial services sector of the market is heading toward a downturn. With its triple-leveraged exposure to the inverse performance of the Russell 1000 Financial Services Index, FAZ offers a potential way to profit from market volatility.
Looking at our A.I. data, FAZ is showing several promising signals with a model grade of "B," placing it within the top 25% of data accuracy. The 10-day forecast shows a one-way, extremely impressive, steady trend upward; this is the type of trend I look for when identifying a symbol that is likely to rise according to the Stock Forecast Toolbox data.
If financials sell off, then it would also be wise to identify one specific symbol that we could short. With this perspective, I have identified a symbol I am banking on sliding in the next few sessions.
TRADE OF THE WEEK - Vlad's Best Bank Bust Trade
Comerica Incorporated (CMA) is a financial services company headquartered in Texas that has since grown to become one of the largest regional banks in the United States, with operations throughout the United States.
Comerica provides a range of financial products and services to individuals, small businesses, middle-market companies, and large corporations; its offerings include deposit accounts, loans, credit cards, investment management, and wealth planning services; the company's stock is listed on the New York Stock Exchange and is a component of the S&P 500 Index.
After conducting thorough research and analyzing the company's financials and market trends, I have come to the conclusion that $CMA is overvalued and vulnerable to the current market downturn. The company has experienced declining revenue growth and profitability, along with a higher level of debt compared to its peers in the financial services sector. Additionally, the recent interest rate hikes by the Federal Reserve are likely to put further pressure on the bank's earnings.
With this information in mind, I am considering shorting $CMA as my best bank bust trade. Let us review the A.I. data.
With a model grade of "A," CMA ranks within the top 10% for accuracy and shows a positive vector of 3.33%. CMA's 52-week range is $29 -$97, indicating that the symbol, trading at $43, is right in the middle of its annual range, providing good room for the downside.
The 10-day forecast data shows a trend that we are banking on - all momentum is pointing toward the downside. A sliding one-sided vector gives me confidence this symbol could sell, making shorting it a good bet.
Looking at our long-term forecast for the symbol, there is one key time range in which our A.I. data predicts CMA to rise and with an update on Sunday, this data could improve even further - with all. The 20-day frame is showing impressive higher gains for the symbol, which could extend to additional time frames when the tool updates on Sunday. Going off our FAZ forecast, I believe CMA should rebound from its recent selloff. See $CMA Seasonal Chart:
This week, I’ll be shorting $CMA in my portfolio!
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