Is it hitting the fan yet?

With Thursday’s revelation that a major US Venture Capital (VC) bank has gone bust and another California retail bank is in difficulties, the trigger was pulled for the start of the Great Wipe-Out.

Suddenly, the eyes of investors swivelled round from staring at next week’s FOMC wth the bulls still clinging to the hope Powell will change his hawkish tune (and Friday’s non-farms) to focus on visions of more bank runs and more failures to come.

And with the bond holdings of many banks well under water, any need to sell to raise capital would cement major losses on holdings they had carried at face value and now are marked-to-market on a sale. Yes, banks can get away with a lot of smoke and mirrors in reporting results. On the other hand,, we traders are constantly marked to market every second.

Tellingly, Treasuries rallied. That is totally contra to the patterns of recent months whereby bonds and stocks have traded in sync. I smell the dead hand of central banks and US Treasury with their Plunge Protection Team hard at work. And the panic buying by stock investors looking for a ‘safe’ haven.

Friday’s rocket in the T-Bonds was the largest percent daily advance for many months but is part of a bear market rally that should reverse soon. And the dollar slumped after staging a decent rally phase – and this event has very likely marked major lows in the ags (see later).

So has this credit event kicked off the long-awaited Third Wave down in shares? The odds are certainly growing as the previously-ignored VIX Fear Index recently plumbed new lows. But it suddenly came to life with a bang on Thursday and Friday

In fact, it surged to the 27 level on Friday – a massive gain of 35% in three days. I have been warning members to expect this sudden re-awakening. While bullish sentiment for shares reached ridiculous extremes, the VIX was pummelled down to sub-20 levels by hedge funds who kept their fingers on the Sell button. DSI bullish sentiment had reached rock bottom.

So we have yet another panic short squeeze of the Big Boys whose intensity matched that of the panic selling of US bank shares on Thursday and Friday.

This is one more textbook example of how hedge funds typically hold their largest position size at major reversals thus leading to often panic covering. And since we are in a third wave down in shares, I expect the VIX to reach levels unseen since the Corona Crash of March 2020 where it peaked at 80. It would not surprise me to see it reach well over 100 in the coming crash.

As a measure of the panic selling, over 90% of the S&P 500 shares closed lower on Thursday and Friday. Here is my take on the Elliott wave picture

The move above my upper tramline was an ‘overshoot’ or false breakout and is now trading well under this tramline. The next target is the critical wave B low at 3760. Breaking that low would spell curtains for shares – and the economy as it would head into the depression I have been calling for.

Short term, I expect a pause in the Elliott Wave third wave of what will be a five-wave decline – as the March FOMC reports on Wednesday – but I am treating any decent bounces as shorting opportunities.

Because I am a swing trader, catching these medium-term swings is an essential part of my professional trading strategy.

In terms of sentiment, last week’s bank ‘wobbles’ (as one pundit called it), the sharp reaction in bank shares, is entirely in keeping with a growing negative social mood. From SPACS to crypto to EV shares to NFTs (remember the non-fungible tokens that have almost disappeared?) these pie-in-the-sky financial ‘assets’ have collapsed in value. And they won’t be back until the next great bull market appears (likely many months away).

Here are the charts of Deutsche Bank – one of the leading international banks. For perspective, I post the long range monthly chart showing just how far the shares have fallen off the 2007 ATH. Remember, this period included a phase of extreme central bank money printing where Wall Street’s pavements were lined with dollars. How could a bank not make major profits?

One answer of course was the negative and zero yields of bonds at the time where margins were either very thin or non-existent. Not to mention the weakening economy at the time. And the prohibition on prop trading (trading speculatively for their own account) introduced in 2008 following the financial crash.

And now suddenly traders are starting to worry about banking contagion as occurred here in the UK with Northern Rock in 2007 just prior to the financial crash around the globe. Hmm.

Here is the short term picture

The rally off the October low is a clear Elliott wave a-b-c three up. And a three up is corrective to the main trend which is clearly down. This is Rule 1 in Elliott wave analysis.

Many traders are puzzled by Elliott waves. Some ask what are Elliott Waves? I have a new blog on Mr Ralph Nelson Elliott’s eye-opening discoveries here.

Thus, my wave analysis paints to a clear roadmap ahead – new lows for the banking sector and DB below the October low of 7.20 euros beckons.

This wave analysis can be applied to just about all banks I study. In fact, for Pro Shares we hold short positions in Lloyds.

Can the Fed reverse the prospect for contagion in banking?

Hah! This will be their biggest test since the 2008 Financial Crash. Recall they engaged in mammoth QE (aka money printing) to kick the can down the road (and later during the pandemic). This laid the foundations for the current cliff-edge.

Yes, they could pump funds into failing banks, but will that signal utter desperation to keep all the balls in the air at all costs? With social mood turning negative, such a move may well signal more panic selling. Investors would ask: What nasty surprises does the Fed know that we don’t?

So are banks Too Big To Fail any more?

Of course, with the recent rise in interest rates, profit margins on loans (their lifeblood) have risen sharply. Especially mortgage loans. But home transactions have fallen off a cliff. And real estate prices are in decline with commercial property in a deep decline.

Up till now, the banks have offered rates on retail savings well below policy rates but with a squeeze now emerging on liquidity, they should start to ramp up these rates to maintain capital levels. Central banks will not be able to come to their rescue any longer.

They are in trouble as they attempt to sell off their bond holdings (for major losses).

Much volatility will now emerge in the banking sector and any further news of a ‘wobble’ would set the cat amongst the pigeons and induce further selling.

This is starting to get interesting.

The dollar has reversed lower – bullish for the ags?

My VIP Traders Club members have been long the dollar since last month but when it reached my main target at 105.50 on Wednesday, I advised taking profits. And that turned out to be the high of the entire rally off the 2 February low. The dollar has since plunged to Friday’s low of 103.50.

And that highlights how important correct timing of entries – and exits – really is. And I used my Tramline Trading Method to provide the signals.

As I commented to members, we dodged this bullet by this highly accurately timed exit with a good profit. I had lined up that target to take profits using my Elliott wave analysis of the preceding waves as well as Fibonacci level analysis.

I have been looking for a major reversal in the corrections in Wheat especially. Prices have been forced lower for months as record crops have come to market and the Ukraine supplies seem to be free-flowing.

But the cure for low prices is always low prices. And these low prices should encourage some farmers to plant less Wheat this year in favour of a more attractive crop. Wheat prices have precisely halved in the past year – a significant Fibonacci correction.

The market has been in the doldrums for many months as hedge funds have piled on the pressure (they are very short). But could last week’s reversal in the strong dollar mark a similar turning point for Wheat? US prices have been high compared with the competition and a weaker dollar should spur US exports and support Chicago prices.

Note the RSI reached very oversold levels last week and only a slight uptick in sentiment should produce outsized rallies. Hmm.