Equities bounced back nicely in trading Tuesday, thanks largely to solid rebounds in the regional banks. First Republic Bank (FRC) ended up over 25% on the day, while the SPDR S&P Regional Banking ETF (KRE) rose just north of 2% even as it gave up most of its early gains by market close.
The Nasdaq was up 2.1% on Tuesday with the S&P 500 gaining more than 1.6%. Financials overall rallied 2% and all 11 S&P sectors ended in the green, with Communication Services along with the Technology sectors leading the way.
The much anticipated February CPI Report rose 6% on a year-over-year basis which matched expectations. This was a bit lower than the 6.4% rise in January. Core CPI for the month rose .5%, a tad over the consensus. This was the slowest rise in inflation levels since September of 2021.
Futures at the end of the day pointed to a roughly three quarters chance of a 25bps rise in the Fed Funds rate at the Fed meeting next week, with roughly a one quarter chance they leave rates where they are. The 50bps rate hike that was the consensus before the market experienced the second and third largest bank collapses in U.S. history, has disappeared as a possibility. Oil dropped over 4% on the day and the yield on the 10-Year Treasury rose 11bps to 3.69%.
While it was nice to see some green across my portfolio on Tuesday, I don't think the market is anywhere close to being out of the woods as it relates to worries about the banking system. It appears the unfolding drama at Credit Suisse Group AG (CS) is driving markets lower today and will consume investors focus throughout the day.
I will say I am happy to see some insider buying in the financials. Cullen/Frost Bankers (CFR) , TrustCo Bank Corp NY (TRST) , Metropolitan Bank Holding Corp. (MCB) , SLR Investment Corp. (SLRC) , The PNC Financial Services Group (PNC) , The Charles Schwab Corp. (SCHW) and numerous other financial stocks have seen new insider buying over the past few trading sessions.
That doesn't mean insiders aren't anticipating a bounce in the sector. In volatile times like these, investors should remember they are not fishing boat captains that have to go out into the stormy seas to feed their families. They can choose to stay close to shore and away from the brewing gale.
One thing I learned when I played professional poker for 18 months out of college. The best strategy is to play only a few strong hands but play them aggressively. In the meantime, you keep yourself in the game by stealing frequent antes.
Investors should move only incrementally at this point, until the markets provide more clarity and certainty. This week I executed some new covered call positions in the SPDR S&P Regional Banking ETF using a strike price a bit over 10% below the current trading levels of this ETF. This move provided a lot of diversification across the "not too big to fail" banking space, a lot of which insiders are starting to purchase.
In addition, this simple option strategy gives me additional downside protection as well as a three and one quarter percent dividend yield. It should deliver a good return if this is not the total collapse of the regional banking system, which I believe we will avert.
