Most good movies or books have a villain of some sort. The character that you root against, but also respect because it adds a certain excitement to the story.
For the last two weeks, I've been warning that the seasonal backdrop of the market is weak. Weak is actually a nice way to put it.
According to both weekly and monthly seasonality trends, the span between August and September are lean for returns. Scratch that, they're just plain bad.
We just got into week 32 for the market, identified with the callout in the chart below.
So, the "Dog Days of August" are now upon us. Historically this is the time of year when volume dries up and prices go down. Literally.
But it's not that easy... Keep reading and I'll break it down
The problem with seasonality is that it needs a "trigger". We need a villain. You know, something to blame the seasonality on.
Think about it, the most popular seasonal trend to talk about is "Sell in May and go away", but how well does that work? It's about a 50/50 proposition. Unless there's a reason for it to work.
Historically, that seasonal trend doesn't work well unless there's a trigger. Bad earnings, the market is already in a bear market trend, you get the idea.
The Regional Banks may turn out to be this summer's villain.
This morning, Moody's announced that they were lowering their credit rating on a list of regional banks. They've started with the smaller regional banks, but there's more.
Moody's also put a few of the larger regionals on credit watch.
Names like U.S. Bancorp (USB), Bank of NY Mellon (BK) Truist Financial (TRST), and State Street Corp (STT) were put on notice that they were under review for downgrading.
The reason?
Moody's feels that the credit strength of these banks will be challenged by liquidity and pressure on their profitability. Put another way, they've got balance sheet risks.
In March I talked about the failure of two regional banks as an earthquake in the banking sector. I also warned that just like any other earthquake there would be aftershocks.
These downgrades and credit warnings are an aftershock... But there's a bigger problem now. Its called "The Slope of Hope"
Let me explain in less than 200 words.
The regional bank ETF (KRE) has rallied 18% over the last month. The reason is simple, short-term traders have been rushing in to buy these companies at a discount. Trying to "catch a falling knife".
And it's paid off so far.
The regional banks have outpaced the Nasdaq 100 (QQQ) fifteen-fold as the QQQ shares are trading just 1% higher over the same one-month period. That's the power of all of that negative sentiment that was priced in the regional bank shares in April unwinding.
It's an amazing example of "The Wall of Worry", but climbing that wall has its dangers.
The regional banking stocks are now no longer priced for the worst-case scenario. Instead, they've been bid higher as investors have attempted to call a bottom in a sector that still has fundamental risks.
Optimistic sentiment on a fundamentally questionable sector signals the potential that these stocks will slide down the "Slope of Hope".
There you have it, in 155 words.
Side note, you've just met the "villain" that may trigger the market's seasonality, the Regional Banks (KRE).
The hot hand in the market - the Nasdaq 100 - has been slowing its ascent for the last month. Names like Microsoft (MSFT), Apple (AAPL) and NVIDIA (NVDA) are posting losses over the last month.
Put that together with the potential for the Regional Banks to feel another "aftershock" and you've got the potential for the market to experience its first "healthy correction" in more than eight months.
The good news? The market needed a short-term healthy correction.
Despite the breakneck rally that we've seen in 2023 there is plenty of cash sitting on the sidelines waiting for an opportunity to "buy the dip".
We're not talking a half percent "by the dip". Day trading volume has slowed as trends have replace volatility.
I'm talking about investors - both professional and individual - getting an opportunity to buy some of the market leadership at a 10% discount.
Ten percent seems like too much you say?
Consider that Microsoft and Apple are already down more than 10% from their highs just a few weeks ago.
So how do you take advantage of this Summer Swoon?
Step One: Pick your targets.
Prepare a list of those stocks poised for support from their intermediate-term technical trends.
For example, I own shares of Microsoft (MSFT) and Palantir (PLTR) and would like to add to these Artificial Intelligence Names. They're on my "Target List".
Step Two: Name your price.
Progressive Insurance (PGR) has the "Name Your Price Tool", you need something similar. In my case, it's the use of a stock's technical patterns. Again, we're not day trading here, so I'm using the 50-day moving average as my first tool to "name my price".
In the case of Microsoft and Palantir, those prices are $335 and $16 respectively. Microsoft is trading below that trendline while Palantir just bounced from its 50-day today. I'll explain how I use the same trendline to "name my price" tomorrow.
Step Three: Be patient.
Most often an Investor's biggest mistake - both professional and individual - is moving too quickly.
Remember, every trend has noise, and all noise forms a trend. By using the trendlines and seasonality trends I've talked about today you will reduce the feeling of urgency to jump into a stock as a knee-jerk reaction.
The post Earthquakes, Aftershocks and the Regional Banks Are Just What the Market Needed appeared first on Penny Hawk.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.