Is Credit Suisse a Lehman Moment?
The term Lehman Moment describes a period in time when the problems of a company become a global financial crisis. The popular term refers to the 9/15/2008 bankruptcy of Lehman Brothers, the fourth-largest investment bank in the United States (behind Goldman, Morgan Stanley, and Merrill Lynch). It is seen as a pivotal point when the problems of U.S. investment banks and financial institutions became a global problem.
Credit Suisse received a clean bill of health from regulators last week. In less than a week, the Swiss government forced the sale of the 167-years company to its cross-town rival UBS.
Credit Suisse’s collapse became the third major financial institution to fail after the abrupt implosion of Silicon Valley Bank and Signature Bank, the second and third biggest financial company failures in U.S. history.
The fallout from the two U.S. banks and now Credit Suisse has shaken global investors. Bank stocks and global markets rallied on Monday as investors cheered the speedy weekend rescue of Credit Suisse. However, more market volatility is likely this week as markets wait to see how government regulators and policymakers respond to the banking developments. Also, the next FOMC meeting is on Wednesday. Fed will discuss raising interest rates again to contain inflation pressures.
Is the failure of Credit Suisse a Lehman Moment?
Is this a repeat of the global financial crisis nearly 15 years ago?
Here is a technical summary of the global financial crisis/great recession of 2007-2009.
A well-defined downtrend channel existed from late-2007 into late-Sept 2008. A death cross-sell signal on 12/21/2007 first warned of the start of a bear market decline. The Lehman bankruptcy on 9/15/2008 led to a brief relief rally, fading on 9/19/2008 as SPX struggled near the declining 50-day ma, reaffirming the market rolling over. The 9/29/2008 channel breakdown ignited a market capitulation/selling climax that subsequently found a market bottom at 666.79 (3/6/2009). From start to finish, SPX lost 909.30 points or 57.69%, ending one of the worst bear markets since the Great Depression.
Into the 9/29/2008 channel breakdown, money rotated into the safety of the large-cap SPX market, at least from a relative strength perspective. However, from late Nov 2008 to Mar 2009, selling resumed in SPX/WLSH.
The SPX advance-decline line also broke down in early-Oct 2009.
Interestingly, a momentum bottom occurred in Oct 2009. A subsequent higher low in early-Mar 2009 confirmed a positive divergence, signaling the end to the 2007-2009 global financial crisis/great recession.
The RSI overbought/oversold indicator achieved an oversold condition below 30 in early Mar 2009 before the 3/6/2009 market bottom.
The +DI trend indicator moved above the -DI trend indicator in mid-Mar 2009.
No two markets are identical. However, there are similarities and differences between the Lehman Moment of 9/15/2008 and the Credit Suisse failure of 3/20/2023.
The similarities are:
(1) Both occurrences established downtrend channels after their respective market peaks (10/11/2007 and 1/4/2022).
(2) Both recorded death cross-sell signals (12/21/2007 and 3/11/2022) nearly 2-months after recording market tops.
(3) Both failed to clear their 200-day ma and the top of their downtrend channels (5/19/2008 and 8/16/22).
(4) Both remain in bear market levels (20%-plus) on the 1st anniversary of their declines.
The differences are:
(1) The current bear decline recorded a golden cross buy signal (2/1/2023).
(2) The current bear market broke the top of the Jan/Mar 2022 downtrend in late-Jan 2023.
(3) A technical base may have developed from the 10/13/22 low (3,491.58).
(4) A trading range may have developed between 3,700-3,800/3,500-3,600 (support 1 and 2) and 4,100-4,200 (resistance).
(5) A breakout above 4,200 hints at a rally of 700 points or a retest of 4,818.62 (1/4/22 all-time high). A breakdown below 3,500 warns of a deeper selloff to 2,800-3,000.
From a technical perspective, it will be a nail-biter over the next few days, coinciding with the next FOMC meeting concluding on Wednesday, 3/22/23.
There are enough similarities and differences to suggest either a market bottom is developing or the start of the next major selloff.
Although nobody rings a bell at the top or the bottom of a market, in the last phase of a bear market, stock prices can continue to fall but at a slower pace, exhausting the remaining sellers. Selling exhaustion and less bad news tend to attract investors to return, leading to a firmer market bottom and the start of the next bull market.
Another inflection point is near. The outcome will help to decide the next directional trend of the U.S. stock market.