Since most of our readers are investors, it makes sense that I'm getting questions about specific banks and brokers.
Naturally, everyone wants to know if their money is safe. In addition, investors want to know if it's time to buy the stocks of these institutions.
Let's start with the one question I keep hearing right now: "Are my trading accounts insured?"
It's important to understand the limits of Federal Deposit Insurance Corporation insurance. The FDIC does not insure investments in stocks, bonds, mutual funds, or even money market funds. This is true even if those investments are held at an FDIC insured bank.
Now let's look at how investors should approach the financial sector.
If we read between the lines of Treasury Secretary Janet Yellen's recent statements, large financial institutions that pose systemic risk are likely to receive bailouts, if needed. However, smaller banks and brokers may be left to fend for themselves.
Capital is flowing into the "too big to fail" behemoths. According to the Financial Times, $286 billion has flowed into money market funds this month. The biggest winners include Goldman Sachs (GS) and JPMorgan Chase (JPM) .
There is a stark contrast between the performance of the shares of large and small financial institutions.
Large banks and brokers, represented here by the S&P Select Financial SPDR (XLF) , blue, have fallen by about 20% since the start of 2022. That's much better than the performance of regional banks, represented here by the S&P Regional Bank SPDR (KRE) , green. KRE has fallen more than 38% over that same period.
Note how these two ETFs normally move in lockstep, but have diverged over the past few weeks.
Chart Source: TradeStation
Because capital inflows are the lifeblood of financial institutions, some investors are wondering if now is a good time to step into large-cap financial stocks. According to the charts, that time hasn't arrived. Some of the biggest players in the financial sector could see additional downside.
For example, Toronto-Dominion Bank (TD) subsidiary TD Bank, is currently the 10th largest U.S. bank. TD has spent the past two years forming a massive head and shoulders pattern, including multiple right shoulders (L-H-R-R).
The neckline of this bearish pattern comes in at $55, and a break of that level would create downside pressure. TD's falling 50-day moving average (blue) is crossing below its falling 200-day moving average (red), a bearish momentum signal.
Chart Source: TradeStation
TD Bank's chart is similar to many large financial institutions. What about smaller banks and brokers?
TD's former brokerage business, TD Ameritrade, is merging with Charles Schwab (SCHW) . This stock has been under fire, and after bouncing from the $50 area, looks ready to reach new lows.
Schwab has formed a bear pennant (black lines), and the stock's falling 50-day moving average (blue) is crossing beneath its falling 200-day moving average (red).
Chart Source: TradeStation
Bottom line: It's not a great time to buy big financial institutions, and it's an even worse time to buy small ones.