Watch XLF Today. It Is the Key

SVB Financial (SIVB) had to sell assets and that is sparking fear across the financial sector. As banks go, so goes the market today.

MARKET COMMENTS FRIDAY – Yesterday the market attacked the major moving averages and it closed below them. Financial stocks lead the move lower and that is never a healthy sign for the market. Hourly wages only increased .2%. That is great news on the inflation front since it is the largest input cost for companies. However, that news is NOT likely to overpower credit concerns that have surfaced.

The demise of Silvergate (SI) and credit issues at SVB Financial (SIVB) are weighing on banks. In short, this is going to have a ripple effect and it will take time to see if other banks are “on the ropes”. There will be some liquidation of assets and that will keep a temporary lid on the market. I am not looking for a financial crisis (contagion). This will run its course soon.

The jobs report was strong and 311K thousand new jobs were created in February. This is going to give the Fed room to hike rates by 50 basis points, but they are more likely to error on the side of caution. They do not want to add fuel to the fire when banks are weak. There is a discovery process that will take place in the next few weeks and the damage will be assessed. Large trading firms will be trying to sniff out weakness and they will try to identify other “players” who might be in trouble.

The big event next week is the CPI on Tuesday. We will see if inflation eases. Any reprieve would be market friendly and we will rally back above the major MAs. If the number is “hot”, it will fuel the breakdown.

Swing traders are long from $409. The SPY is below the $393 support level and we wanted that to hold this morning. The market is still holding pretty tight to that level and we do not want to spend much time below it. I will be watching the financial stocks (XLF) and using it as a gauge of how widespread the financial crisis is. If the ETF finds support it will be a sign that the issue is relatively contained. I suggest holding off on new bullish put spreads until we are back above SPY $393. I am sticking with my bullish put spreads until I see how the day plays out. I am also ready to take assignment on the naked puts I sold on stocks. I want to buy those stocks. Most of them are in great shape with a week to go.

Day traders need to keep an eye on XLF. If financial stocks are able to recover from early selling, the market will bounce. If XLF remains weak, the market will not be able to rally. Also keep an eye on VXX/VIX. If the spike yesterday is reversed, it will be a sign that Asset Managers are not that worried about contagion. After 90 minutes of trading, the bid is firm and another round of heavy selling today is unlikely. We could even see a nice bounce if we close the gap from the open. The market has a higher low double bottom.

I am generally very market neutral here. There are plenty of cross-currents, but neither side is able to move the ball.

Support is at $387.50. That is the low today and I don’t believe we will retest it. SPY $393 is resistance.