For most of 2023, there has been a battle between the bulls -- who are primarily focused on positive price action -- and the bears -- who are mainly focused on the economy, valuation, and poor fundaments.
The bears had the edge when the banking crisis hit the market by surprise, but the bulls have been quite stubborn and rotated out of financials and oil and into other sectors. Price action was the king again, today and frustrated the bears who believe this market is ignoring many major problems.
Government agencies and some very large banks have moved quickly to deal with issues in the banking sector. There was great concern that Silicone Valley Bank ( SIVB) and Signature Bank ( SBNY) were just the tip of the iceberg, but the problem has been dealt with by guaranteeing deposits at those two banks and by providing liquidity to other banks that are sitting on big unrealized losses in their bond portfolios. Authorities in Switzerland dealt with concerns about Credit Suisse ( CS) by providing a $52 billion loan, and in the U.S., large banks agreed to deposit more than $30 billion in funds to deal with liquidity issues at First Republic Bank ( FRC) .
These actions don't fix the harm that high-interest rates have done to balance sheets, but they provide liquidity, and that will prevent the sort of run that destroyed SIBV. Investors took comfort in the news and pushed the market sharply higher when the FRC "rescue" was announced. Technology stocks had already been doing well, and the combination of short-squeeze, poor positioning, and fear of missing out got the market running into the close.
Once again, the price-action bulls gained some confidence, while the economic bears scratched their heads and wondered why the market doesn't care about the glaring problems that are out there.
The battle is not over, but the price-action bulls have some momentum and no real obvious negative catalyst until the Fed interest rate decision next Wednesday. Conditions now are quite different from what existed back in January when the bears were crushed by the price-action bulls. There still are substantial issues in the financial sector, and there are likely to be some other banks that will need help as things unfold.
The immediate issue will be whether the Fed thinks that the crisis in banking is bad enough to justify a substantially less hawkish approach, even if inflation is not slowing. The European Central Bank stuck to its 0.5% hike today, which gave the market some confidence about banks. The Fed is very aware that it can't send a message that it is worried about the banking system. This is not an easy market to trade. There are very good reasons to believe that economic problems like ahead, but the price action bulls are very aggressive in the short term and are fast to take advantage of overconfident bears.
Have a good evening. I'll see you tomorrow.
