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Bank Failures and the Risk of Financial Contagion

U.S. stocks sold off sharply after the collapse of Silicon Valley Bank (SIVB) or the second-biggest U.S. bank failure in U.S. history. Although the U.S. banking system is relatively healthy, regarding capital ratios, the SIVB failure has led to a sharp setback in the Financial sector and a modest decline in U.S. stocks. Also, concerns about the bank contagion have led to investors seeking out the safety of U.S. Treasuries as yields fell across the board. Implied Volatility, as evidenced by the VIX index, abruptly jumped.

Federal Deposit Insurance Corp.’s decision to close Silicon Valley Bank led to heavy selling in other regional banks and financial institutions. The bank’s failure made headline news and overshadowed last week’s Labor Department’s February employment numbers, including the stronger-than-expected payroll growth and increase in unemployment and labor force participation rates.


The mixed messages from last week’s jobs report and the recent bank failures suggest the market is now pricing in a 39.5% probability of a 50-basis point hike in the next FOMC meeting (3/22/23) as compared to 75% last Thursday. Traders will continue to monitor the upcoming inflation and retail sales data to help gauge the next rate hike.


Investors continue to focus on interest rates, inflation, recession, and now the regional banking turmoil. The SIVB collapse, Silvergate Capital Corp voluntarily shutting down, and the Signature Bank (SBNY) takeover by bank regulators open the door for the risk of contagion in banking. Whether it is an isolated situation or a spillover that spreads to the financial system remains to be seen.


Major U.S. stock indexes were relatively calm today as S&P 500 Index (SPX) declined 0.15%, Dow Jones Industrial Average (INDU) fell 0.28%, and the Nasdaq Composite Index (COMPQ) rallied 0.45%. However, the S&P Financial sector plummeted by 3.95%, and many financial-related industries continued with their selling from last week, including Dow Jones US Banks Index (-7.32%), Dow Jones US Life Insurance Index(-5.54%), and Dow Jones US Full Line Insurance Index (-5.34%).


Technically speaking, two head and shoulders tops warn of further selling pressures for SPX. The smaller head and shoulders top dates back to Jan 2023. The larger head and shoulders top is from Nov 2022.


Jan 2023 head/shoulders top


Head = 4,195.44 (2/2/23 high)

Left shoulder = 4,015.39-4,039.31 (1/17 & 1/23/22 highs)

Right shoulder = 4,078.49 (3/6/23 high)

Neckline = 3,877.29-3,928.16 (1/10, 1/19, & 3/2/23 lows)


A breakdown below 3,928.16 = -318.15 points or 3,610

To negate the Jan 2023 h/s top by breaking out above 4,078.49 and 4,195.44.


Nov 2022 head/shoulders top


Head = 4,195.44 (2/2/23 high)

Left shoulder = 4,100.51-4,100.96 (12/1 and 12/13/22 highs)

Right shoulder = 4,078.49 (3/6/23 high)

Neckline = 3,744.22-3,764.49 (11/9 and 12/22/22 lows )


A breakdown below 3,764.49 = -451.22 points or 3,313

To negate the Nov 2022 h/s top by breaking out above 4,078.49-4,100.96 and 4,195.44.


Source: Courtesy of StockCharts.com

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