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The Markets Can Run, but They Can’t Hide
Another bank fails as FRC officially goes down.
Danny Riley
May 01, 2023
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Our View
While the markets continue to overlook the perils of the banking crisis, multiple banks have had to be rescued or have failed in 2023 and I don't think it's over. How many are there and how will this impact commercial real estate?
For those that think First Republic was a small bank, think again. It was the 14th-largest commercial bank in the US. Yesterday was the FDIC’s deadline for bids from six major banks for the failed bank, the third failed bank in just two months after Silicon Valley Bank and Signature Bank.
Before I move forward, I want to remind everyone of the old saying, “fool me once, shame on you. Fool me twice, shame on me.”
I’m not going to write a lot on First Republic specifically — all you have to do is Google “FRC” — and I’m not going to say whether I expect more bank failures. Instead, I’ll just say that history tends to repeat itself.
I was working in the CBOT bond pit in the beginning of the 1983 bank crisis when the FDIC had $2.2 billion in failed bank assets. The 45 bank failures in 1983 had an aggregate of $4.3 billion in assets, some of which were sold at resolution. I was manning my S&P 500 futures and options desk as the 2008 credit crisis unfolded. I could copy & paste the names of those failures, but here is a more complete — and somewhat frightening — list since then.
Perfect Storm
All of this is only going to exacerbate the other black hole: The commercial real estate market, which is just starting to warm up. A story was floating around last week that said a San Francisco office building was worth $300 million before the pandemic. Now, it could sell for only $60 million — and “for sale at best offer.”
This is a perfect example of why the big cities are in trouble and there are many other examples like this too. When the owners of these buildings foreclose or otherwise take a big hit, the banks will be forced to take back the property and write off billions. This will in turn force borrowing rates higher (as risk increases).
In conclusion, obviously the stock markets are overlooking everything now. Yes, they can run, but they can't hide.
Our Lean
Today is the first trading day of May and according to the Stock Trader's Almanac, the first trading day of May has the S&P up 18 of the last 25 occasions. This week highlights a high level of economic reports, earnings and the Fed’s two-day meeting (on May 2nd and 3rd).
As we all know, despite my views on the overall landscape, I’ve been doing exactly like I’ve repeated for six weeks now when it comes to direction: If the ES is going up, I want to go for the ride.
I am not here to fight city hall and the markets have reacted accordingly but...if the ES gaps higher on the open today, my lean would be to sell it. On the flip side, I also expect volume to drop significantly over the next 2.5 days (ahead of the Fed’s announcement) which could very well favor the upside.
So Our Lean is to sell the gap up and buy the pullbacks keeping in mind that the ES is up against big resistance in the 4230-4250 zone and has rallied 125 points from Wednesday’s low to Friday’s high.
MiM and Daily Recap
The ES traded down to 4131.50 on Globex and opened Friday's regular session at 4144.50. After the open, the ES down-ticked to a 4143.75 low for the day and rallied up to 4157.50 at 10:00, which is when the ES started getting hit by what I call 'rolling buy programs.' The ES made a new high at 4133 at 11:21, showed some hesitation, sold off down to 4163, rallied back up to a lower high at 4177.75 at 10:58 and then dropped 25 points down to 4152.75 at 11:02. From there, it stutter-stepped up to a new high at 4185.75 at 1:01.
The ES hung near the highs, then pulled back down to 4175.75 and then rallied back up to 4186.25 at 3:21 as the early imbalance showed $390 million to buy. After that, it dropped down to 4176.50 at 3:36 and popped up to 4182 at 3:44. The ES traded 4179.75 as the 3:50 cash imbalance showed $1.265 billion to buy and traded 4189.50 on the 4:00 cash close. After 4:00, the ES 'shot' up to 4193.75 at 4:05 and settled at 4190.75 on the 5:00 futures close, up 37 points or 0.89% on the day. The NQ settled at 13,325.75. up 94.4 points or 0.71%. Crude oil (CL) settled at $76.78, up $2.02 or 2.7%.
In the end, everyone is always asking...Why did the ES rally so much? It's called vol control and it's something you need to learn and apply to your trading tool box. I will go over this soon in the Our View section. In terms of the ES's overall tone, the leader was the ES and it was overly firm despite a few big dips and it closed strong. In terms of the ES’s overall trade, volume was steady at 1.69 million contracts traded.
Technical Edge —
NYSE Breadth: 72% Upside Volume
Advance/Decline: 72% Advance
VIX: ~$16.50 — (52-week lows on Friday and its lowest level since Nov. 5, 2021)
When you have a series of individual stock trades go your way for an extended period of time you — or at least I — start to look around at the markets a little more closely to make sure I’m not being too greedy.
Let’s be sure to keep that in mind as we go into a busy, busy week.
S&P 500 — ES
ES Daily
Upside Levels: 4200, 4242
Downside levels: 4130-35, 4115, 4095-4100
SPY
The SPY jammed into our $415 to $416 resistance level late on Friday and closed in that zone. How it handles this area will be interesting.
SPY Daily
Upside Levels: Over $415-16 puts $418.31 in play. Then $421.25
Downside Levels: $410-11, ~$406.50, $404
Note: For intraday SPY & SPX traders, a dip to the 10-ema on the 1-hour chart may be an attractive buying opportunity on Monday.
SPY H1 Chart
SPX
SPX Daily
Upside Levels: Over 4170 puts 4195-4200 in play, then 4220.
Downside Levels: 4110-15, 4095, 4075, 4050
QQQ
QQQ breaks out over $321 so the job for the bulls now? Hold this area as support!
Could this breakout open the door up to the $330s? It will hinge on Apple and the Fed, but it’s certainly possible.
QQQ Daily
Downside levels: $321, $316
NQ
NQ Daily
Could 13,500+ be in play for the NQ?
Yes, but — and there is always a “but” — we need to see it clear this tricky 13,330 to 13,350 area. If it can’t and it breaks back below it, 13,150 to 13,175 could be in play.
DAX
DAX Daily
Look at the way the DAX has held ~15,650 and the way that ~15,920 has kept it in check. Despite all the chaos in the world, the DAX is just a stone’s throw away from ATHs.
A break and hold over 15,925 could open the door back to 16,283. I know not a lot of traders trade the DAX here, but its chart was too clean not to include.
Obviously, failure at 15,920 puts 15,750 to 15,800 back in play, followed by 15,650.
Guest Post
Our Friend Cary at Artec is back again in back-to-back Opening Print editions, this time with a quick breakdown of the US Dollar Index. More below:
Open Positions
Bold are the trades with recent updates.
Italics show means the trade is closed.
Any positions that get down to ¼ or less (AKA runners) are removed from the list below and left up to you to manage. My only suggestion would be B/E or better stops.)
** = previous trade setup we are stalking.
Down to Runners in GE, CAH, LLY, ABBV, AAPL.
AAPL — Boom! There’s our $168.50+ on AAPL to get down to ⅓ or less. Add another runner to our list. Congrats to holders, this one took a little time.
For runners, raise stops to $163 for aggressive bulls, $165 for conservative players.
BRK.B — long from $319-ish — trimmed $325 to $325.25+, then $327+, down to ⅓ here.
Raise stops to $322. Look for $329.50 to $330 to exit or to get down to runners.
MCD — Long from $291.50 — trimmed ⅓ at $292.50+, down to ½ or less at $295+
Down to runners if we see $297.50+ & Break-even stop on remainder.
Can justify trimming down to runners over last week’s high if so desire, but it’s been a strong run, so may feel fine to let a portion of this try to run.
Go-To Watchlist
Feel free to build your own trades off these relative strength leaders
Relative strength leaders → Tech remains absolutely the strongest group lately.
MCD, PEP & KO, WMT, PG — XLP
LLY
NVDA, CRM
MSFT, AAPL, META
PANW, FTNT (10-week/50-day combo & prior breakout level)
ULTA & LULU
GE
FSLR
HCA
DKS
WYNN
MELI
Economic Calendar
