We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
I wrote an article titled “5 Reasons to be Long Tech”, in mid-March. Twenty days later, many of the predictions came true. Mega-cap tech stocks have shined, while small caps have lagged. The reasons presented within the article included:
Positive technical setups and price action:At the time of the writing, the Nasdaq 100 Index was pulling back to its 50-day moving average for the first time since breaking out. Also, the 50-day moving average had just crossed above the 200-day moving average, forming a bullish “golden cross”.
Image Source: Zacks Investment Research
Fed Pivot Potential: While the Fed has not done a complete 360, expectations for the remainder of the year point to a slowdown in rate hikes or a pause.
Money Flow out of Small Caps: Regional banks have acted as the proverbial “pebble in the shoe” for the general market. However, money has flowed out of small-caps and into large-cap tech stocks such as Apple ((AAPL - Free Report) ), Microsoft ((MSFT - Free Report) ), and Alphabet ((GOOGL - Free Report) ).
2023’s market is one of the most bifurcated markets in recent memory. The Russell 2000 Small Cap Index ETF ((IWM - Free Report) ) remains stuck below its 200-day moving average and continues to look vulnerable. Meanwhile, the Nasdaq 100 ETF ((QQQ - Free Report) ) is coming off a scorching hot 20% first quarter.
Regional Banks are Vulnerable
As long as regional banks have held steady, outside sectors have been able to gain ground. However, any time they break down further, they tend to drag down the entire equities market. The SPDR Regional Bank ETF ((KRE - Free Report) ) is the most popular proxy for smaller banking stocks in trouble. If you consider KRE’s technical picture, another leg down may be in the works. First, the index is shows a ton of relative weakness – KRE was down 29% in March, while QQQ was up 10%. Second, it continues to lag and is breaking down from a classic bear flag pattern.
Image Source: Zacks Investment Research
Looking deeper, individual banking stocks are still showing concerning price action despite insiders doing their best to defend the stocks. For example, banking and brokerage firm Charles Schwab ((SCHW - Free Report) ) saw a temporary boost when CEO Walter Bettinger decided to showed that he has skin in the game. Bettinger purchased 50,000 shares for nearly $3 million. Despite the vote of confidence by the CEO, shares are down 6 weeks in a row and look poised to retest the panic lows.
Metropolitan Commercial Bank ((MCB - Free Report) ) is in a similar situation to Schwab. The stock split wide open a few weeks ago. Then, insiders tried to defend the stock, but it continues to roll over.
Image Source: Zacks Investment Research
The strongest banks in the market currently are the larger, well-capitalized banks such as JP Morgan (JPM), UBS ((UBS - Free Report) ), and HSBC ((HSBC - Free Report) ). Based on the price action in regional banks, it would not be a surprise if more banks were to go bankrupt or get purchased for pennies on the dollar like Credit Suisse ().
Tech Deserves a Rest
As I mentioned earlier, tech has brushed off the current banking crisis since regional banks have stabilized. That said, another leg lower in regional banks may drag down Nasdaq stocks too. Beyond regional bank weakness, leading stocks such as Nvidia ((NVDA - Free Report) ) are becoming extended from a technical basis. Earlier this week, NVDA’s relative strength index (RSI) reading flashed the most overbought levels in more than a year.
Image Source: Zacks Investment Research
Bottom Line
As legendary trader Jesse Livermore once warned, “There’s a time to go long, a time to go short, and a time to go fishing.” For traders, being patient and picking spots is a superpower. With tech stocks extended and regional banks breaking down, now may be an excellent time to build a watch list and wait for “your pitch”. While the market may not need to pullback, a reset or a consolidation would be a healthy development and would provide more attractive reward-to-risk zones.
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Regional Banks vs. Tech: What Lies Ahead?
Tech’s Strong 2023
I wrote an article titled “5 Reasons to be Long Tech”, in mid-March. Twenty days later, many of the predictions came true. Mega-cap tech stocks have shined, while small caps have lagged. The reasons presented within the article included:
Positive technical setups and price action:At the time of the writing, the Nasdaq 100 Index was pulling back to its 50-day moving average for the first time since breaking out. Also, the 50-day moving average had just crossed above the 200-day moving average, forming a bullish “golden cross”.
Image Source: Zacks Investment Research
Fed Pivot Potential: While the Fed has not done a complete 360, expectations for the remainder of the year point to a slowdown in rate hikes or a pause.
Money Flow out of Small Caps: Regional banks have acted as the proverbial “pebble in the shoe” for the general market. However, money has flowed out of small-caps and into large-cap tech stocks such as Apple ((AAPL - Free Report) ), Microsoft ((MSFT - Free Report) ), and Alphabet ((GOOGL - Free Report) ).
_______________________________________________________________
What now?
2023’s market is one of the most bifurcated markets in recent memory. The Russell 2000 Small Cap Index ETF ((IWM - Free Report) ) remains stuck below its 200-day moving average and continues to look vulnerable. Meanwhile, the Nasdaq 100 ETF ((QQQ - Free Report) ) is coming off a scorching hot 20% first quarter.
Regional Banks are Vulnerable
As long as regional banks have held steady, outside sectors have been able to gain ground. However, any time they break down further, they tend to drag down the entire equities market. The SPDR Regional Bank ETF ((KRE - Free Report) ) is the most popular proxy for smaller banking stocks in trouble. If you consider KRE’s technical picture, another leg down may be in the works. First, the index is shows a ton of relative weakness – KRE was down 29% in March, while QQQ was up 10%. Second, it continues to lag and is breaking down from a classic bear flag pattern.
Image Source: Zacks Investment Research
Looking deeper, individual banking stocks are still showing concerning price action despite insiders doing their best to defend the stocks. For example, banking and brokerage firm Charles Schwab ((SCHW - Free Report) ) saw a temporary boost when CEO Walter Bettinger decided to showed that he has skin in the game. Bettinger purchased 50,000 shares for nearly $3 million. Despite the vote of confidence by the CEO, shares are down 6 weeks in a row and look poised to retest the panic lows.
Metropolitan Commercial Bank ((MCB - Free Report) ) is in a similar situation to Schwab. The stock split wide open a few weeks ago. Then, insiders tried to defend the stock, but it continues to roll over.
Image Source: Zacks Investment Research
The strongest banks in the market currently are the larger, well-capitalized banks such as JP Morgan (JPM), UBS ((UBS - Free Report) ), and HSBC ((HSBC - Free Report) ). Based on the price action in regional banks, it would not be a surprise if more banks were to go bankrupt or get purchased for pennies on the dollar like Credit Suisse ().
Tech Deserves a Rest
As I mentioned earlier, tech has brushed off the current banking crisis since regional banks have stabilized. That said, another leg lower in regional banks may drag down Nasdaq stocks too. Beyond regional bank weakness, leading stocks such as Nvidia ((NVDA - Free Report) ) are becoming extended from a technical basis. Earlier this week, NVDA’s relative strength index (RSI) reading flashed the most overbought levels in more than a year.
Image Source: Zacks Investment Research
Bottom Line
As legendary trader Jesse Livermore once warned, “There’s a time to go long, a time to go short, and a time to go fishing.” For traders, being patient and picking spots is a superpower. With tech stocks extended and regional banks breaking down, now may be an excellent time to build a watch list and wait for “your pitch”. While the market may not need to pullback, a reset or a consolidation would be a healthy development and would provide more attractive reward-to-risk zones.