STOCK RALLY ON BOLD GOVERNMENT BANK RESCUE FIZZLES ON FIRST REPUBLIC PRICE ACTION

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By Nigam Arora & Dr. Natasha Arora

To gain an edge, this is what you need to know today.

Bold Government Bank Rescue Plan

Please click here for a chart of First Republic Bank stock (FRC).

Note the following:

  • The Morning Capsule is about the big picture and not an individual stock.  The chart of First Republic Bank (FRC) is being used as it is the leading cause of the reversal in the stock market.
  • On Sunday, the government announced a bold bank rescue plan.
    • Effectively, for the time being, bank deposits are insured for an unlimited amount even though the official limit still stays at $250K.
    • Banks can borrow from the Fed using securities that are now losing money at par value.  In plain English, to illustrate the program, if a bank bought a bond at $100 and it is now worth $70, the bank can borrow $100 against the $70 collateral.
    • The special borrowing program will last one year.
  • On Sunday evening, futures staged a massive rally with Nasdaq futures climbing about 1.5%.  Momo gurus were declaring the start of a new bull market.  Their reason was that the Fed would not increase rates any more in view of the stress in banking.
  • This morning after tremendous volatility to both up and down sides, as of this writing, the rally has fizzled and the market is seeing significant losses as investors are getting spooked by the price action in First Republic stock.
  • The chart shows the price action in FRC.  It has fallen from a high of about $115 to about $29 this morning.
    • First Republic has long been the envy of the banking industry.
      • First Republic has wealthy clients.
      • Its loans perform well and rarely default.  For example, there are rumors that First Republic financed the big mortgage on Mark Zuckerberg’s house.
  • In addition to the support from new government programs, over the weekend, JPMorgan (JPM) came to help  by providing additional liquidity.
  • First Republic now has unused liquidity of $70B up from $60B on Sunday. In addition, the bank can take loans from the Fed under the new program.  At the end of 2022, First Republic had $176B of deposits.
  • Over the weekend, momo gurus were issuing calls to buy First Republic stock.  Take a look at the chart for the fall from Thursday to Friday.  In momo gurus’ view, the stock had become too cheap and after help from JPMorgan and the Fed, the stock was going to strongly jump up today.
  • Contrary to momo gurus’ predictions, the chart shows that the stock has plunged this morning.
  • The reason for First Republic’s plunge this morning contrary to expectations appears to be the rumors that the government wants the bank to be sold.
  • In sympathy with First Republic, stocks of other western regional banks PacWest Bancorp (PACW) and Western Alliance (WAL) are plunging.
  • Money is rushing into the safety of gold and Treasuries.  Yields on Treasuries are plunging.  
  • The predicted peak Fed rate has fallen to 4.8% this morning from 5.7% on Thursday.  This is an extraordinarily large move.
  • Among the gurus, there is a remarkable contrast this morning.
    • Bearish gurus are saying that another leg of the bear market is starting.
    • Bullish gurus are saying that a new bull market is starting.
  • In The Arora Report analysis, it will come down to market mechanics and not the macro and fundamentals.  Whichever way market mechanics succeed in pushing the stock market, first Wall Street’s algos, and then technical investors will jump on that direction. Once the move starts taking place in one direction, there is a high probability that it might be sustainable in that direction.  
  • There are important lessons that all investors should learn from the Silicon Valley Bank (SIVB) failure.  At its root, Silicon Valley Bank’s failure is the result of investment mistakes.  For those wanting next level information, a podcast titled “11 Lessons For Investors From Silicon Valley Bank Failure” is in post production and will be available shortly.
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Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 (To see the locked content, please take a 30 day free trial) stocks in the early trade.  Smart money is 🔒 stocks in the early trade.

Gold

Gold has crossed above the psychologically important level of $1900 as money is rushing into the safety of gold.  

The momo crowd is 🔒 gold in the early trade.  Smart money is 🔒 gold in the early trade.

For longer-term, please see gold and silver ratings.

Oil

Brent crude has fallen below the psychologically important level of $80.  

The momo crowd is 🔒 oil in the early trade.  Smart money is 🔒 in the early trade.

For longer-term, please see oil ratings.

Bitcoin

Bitcoin has recovered losses from last week, paradoxically on the Fed’s rescue program.

Markets

Our very, very short-term early stock market indicator is 🔒 due to too much noise in the data.  This indicator, with a great track record, is popular among long term investors to stay in tune with the market and among short term traders to independently undertake quick trades.

Interest rates are ticking down, and bonds are ticking up.

The dollar is weaker.

Trading futures is not recommended for most investors. The purpose of providing this information is to give an indication of the premarket activity that usually guides the activity when the market opens.

Gold futures are at $1902, silver futures are at $21.49, and oil futures are at $72.88.

S&P 500 futures are trading at 3870  as of this writing.  S&P 500 futures resistance levels are 3950, 4000, and 4200: support levels are 3770, 3630, and 3600.

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 futures are down 243 points.

Protection Bands And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.

Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider holding 🔒 in cash or treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of 🔒, and short term hedges of 🔒. This is a good way to protect yourself and participate in the upside at the same time.

You can determine your protection bands by adding cash to hedges.  The high band of the protection is appropriate for those who are older or conservative. The low band of the protection is appropriate for those who are younger or aggressive.  If you do not hedge, the total cash level should be more than stated above but significantly less than cash plus hedges.

It is worth reminding that you cannot take advantage of new upcoming opportunities if you are not holding enough cash.  When adjusting hedge levels, consider adjusting partial stop quantities for stock positions (non ETF); consider using wider stops on remaining quantities and also allowing more room for high beta stocks.  High beta stocks are the ones that move more than the market.

Traditional 60/40 Portfolio

Probability based risk reward adjusted for inflation does not favor long duration strategic bond allocation at this time.

Those who want to stick to traditional 60% allocation to stocks and 40% to bonds may consider focusing on only high quality bonds and bonds of five year duration or less.  Those willing to bring sophistication to their investing may consider using bond ETFs as tactical positions and not strategic positions at this time.

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Nigam Arora

Nigam Arora

Nigam Arora is known for his accurate stock market calls. Nigam is a distinguished master of the macro. He is a popular columnist with over 100 million page views, an engineer, and nuclear physicist by background. Nigam has founded two Inc. 500 fastest growing companies and has been involved in over 50 entrepreneurial ventures. He is the developer of Theory ZYX of Successful Change Management and is the author of the book on Theory ZYX, as well as the developer of the ZYX Change Method for Investing.

Dr. Natasha Arora

Dr. Natasha Arora

Dr. Natasha Arora has significant expertise in investment analysis especially biotech, healthcare, and technology. Natasha is a graduate of Harvard Medical School followed by a postdoc at MIT. She has published several peer reviewed research papers in top science journals.

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