The Nasdaq 100 just generated a "sell" signal for the first time since November 2021, according to Fairlead Strategies' founder Katie Stockton. The signal was generated on Monday via the Tom DeMark Sequential indicator, which generated a counter-trend "13" sell signal. This could potentially lead to a decline in the broader stock market.
Tech stocks have seen a sharp rebound this year, with the Nasdaq 100 up about 15% year-to-date. However, Stockton highlighted that the Nasdaq is likely to face stiff resistance around 12,850, which represents about 10% upside from current levels.
Outperformance in defensive sectors
Stockton suggests that outperformance in defensive sectors, such as utilities and health care stocks, "would be naturally associated with the next market downdraft." This indicates a potential shift in investor sentiment towards safer options.
Testing longer-term support levels
The Nasdaq just fell below its initial support of 11,776, according to Stockton, paving the way for longer-term support of about 10,600 to be tested. A decline to that support level represents a potential downside of 9% from current levels.
Regional banks: Prospects and challenges
Regional banks are grappling with challenges posed by a shift in investor sentiment towards safer options and the Federal Reserve's rate hike policy. However, there are potential opportunities for investors, as banks are expected to have a better match between revenue from higher-rate loans made over the past year and higher interest payments to depositors, bringing balance to the system.
Inflows into bank stocks and ETFs are also being bolstered as retail investors seek bargains in battered shares. Nonetheless, smaller banks are struggling as their clients move deposits to larger banks for greater stability. Moreover, some clients are ditching their checking accounts in favor of short-term Treasuries, money markets, and other investments with far higher yields.
Regional banks need positive news that shows their deposits are holding firm or growing. Large banks gained $120 billion in deposits, while small banks lost $109 billion last week, and money market fund balances grew by $121 billion, adding to record inflows earlier in the month, according to Moody's Investors Service.
Potential for interest rate hikes
Investors are increasingly confident that the Fed will raise rates at its next meeting, as concerns over financial stability have eased. However, higher rates could pressure margins while further boosting the allure of higher-yielding products that have been draining deposits.
Investors on Tuesday morning were pricing a 48% chance of another rate hike, up from a 17% chance on Friday, according to CME FedWatch Tool. Nonetheless, Christopher Marinac, director of research at Janney Montgomery Scott, believes regional banks have stronger balance sheets than many fear, which enable them to weather a recession and an increase in bad loans.
Potential opportunities for investors
Marinac recommends buying PacWest Bancorp and New York Community Bancorp Inc, citing gains in the industry's loan loss reserve ratio. This is the money set aside to cover bad loans, which has increased from an estimated 0.92% in the fourth quarter of 2019 to 1.12%.
In summary, regional banks face several challenges, but there are still opportunities for investors. As always, investors should carefully consider their individual risk tolerance and investment goals before making any investment decisions.
Bottom Line
In conclusion, the recent "sell" signal generated by the Nasdaq 100, combined with the shift in investor sentiment towards safer options, presents challenges for the stock market and regional banks. However, there are also potential opportunities for investors, particularly in defensive sectors and banks with stronger balance sheets. It is important for investors to carefully consider their investment goals and risk tolerance before making any decisions. As always, keeping a long-term perspective and diversifying one's portfolio is key to navigating uncertain market conditions.
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