Credit Concerns Are Difficult To Calm

The next month will be a time of discovery. Asset Managers will error on the side of caution and they will not buy until they are satisfied that contagion has been avoided.

MARKET COMMENTS MONDAY – This is going to get ugly. The S&P 500 closed below a major technical support level last Friday and the Silicon Valley Bank failure has ignited fear of a credit crisis. This morning we are learning which other banks might be “on the ropes”. The S&P 500 was up 50 points last night and this morning it is down 40 points. Credit concerns are the one thing that can lead to a sustained market decline.

The Fed made a statement over the weekend that they would guarantee depositors up to $250K and that those funds could be taken out today. The SVIB news was out Thursday night. Fed officials should have been actively calming markets Friday before they went into the FOMC “blackout period”, but not a word. The Fed is likely to pause the rate hikes next week.

The CPI is expected to come in at .4% tomorrow. Under normal circumstances, that would be a welcome relief. In this backdrop, it won’t matter.

You will hear news swirling this week. Last Friday I told you to watch XLF and VXX/VIX. If XLF continues to fall, favor the short side. It is a sign that other banks could be in trouble. If VXX/VIX is rising it is a sign of “risk off” hedging.  

Banks will be trying to sniff out weak hands. Many of them handle order flow and they are aware of who is holding what. The Fed and Treasury will also be watching for signs of contagion.

Swing traders exited the SPY position on Friday for a loss when it closed below major support at $393. I’m sorry for this swing trade; it was a blunder. Credit concerns strike quickly and we are likely to see more selling. Asset Managers will error on the side of caution and the bid will be very soft. I also suggest closing bullish put spreads. The naked put writes can be handled on a case-by-case basis, but if you have a gain, take it. Even the best stocks drop in this environment. Investors have to meet margin calls and they sell stocks that are holding up well.

Day traders need to keep an eye on XLF. The overnight reversal from +50 points to -40 points on /ES tells me that the market wants more reassurances from the Fed. We are in “risk off” mode. Asset Managers are not going to bid for stocks with this backdrop. They want to see how widespread this is and if other “dominos” fall. This is going to be a very nervous week of trading into the FOMC and it favors the short side. The Fed needs to make a bold statement next week and I don’t know that they have it in them. Be patient on the open. Only stacked red candles on heavy volume would prompt early action. Option IVs will be sky high so shorting stock is best for day trading.

Support is at $375. We are breaking a D1 trendline this morning. Resistance is at $393.