Stocks continued to run up on Tuesday morning as concerns about the banking crisis started to subside.
Janet Yellen made a number of positive comments about the likelihood of assistance if other banks face issues, and there is chatter about raising FDIC insurance coverage. First Republican Bank (FRC) , which is the most fragile of the banks right now, bounced back about 40% on talk that JPMorgan Chase (JPM) is working on a deal.
The indexes topped out when Janet Yellen started to speak at a meeting of bankers that looked like a routine sell-the-news response. There is still a very big gap under today's lows, and we will see to what degree that is filled this afternoon.
What is most notable about the market right now is that the technical setup as we head into the Fed decision on Wednesday afternoon is not very bullish after the big jump off the lows that were hit last Monday. The market has shown excellent strength despite the worst banking crisis since 2008-9, but it seems to be ignoring the very difficult position that the Fed is in.
If the Fed is too aggressive at fighting inflation and continues to raise rates aggressively, then it will put more pressure on banks that are already reeling from unrealized losses caused by higher rates. However, if the Fed is too dovish in order to avoid hurting banks, then there is a good chance that inflation will heat up again. Trillions of dollars have been made available to banks to deal with liquidity issues, but those funds have to be used in the short term, which is part of what is driving the market up in the short term.
I ran a poll on Twitter asking whether the S&P 500 fund (SPY) has already seen its lows for the year. With around 350 votes so far, 34% yes it has, and 66% say the lows will be undercut.
What is notable about this is that there is such a large percentage that don't trust short-term action. Usually, market bias is impacted by short-term movement. When the market is up, then more folks are bullish, and vice-versa.
In this market, we have a tremendous amount of distrust, but investors are dealing with it by maintaining a very short-term bullish bias. They are ready to exit or go short when the price action shifts.
The Fed news is going to be an interesting catalyst. The market has undergone a very big shift in expectations about interest rates, and we will find out if the market is correctly anticipating the Fed's reaction following the banking crisis.
I'm doing very little right now. I have reduced a few things into strength and have a very large cash position, and I'm not interested in loading up on longer-term positions right now.
