Is the banking system on the verge of systemic collapse? Things to note | chart watcher

2024 will be marked by massive bank failures!!! Well, according to some economists at the far end of the mainstream economic spectrum, yes.

Of course this sounds surprising, but does the fringe position of its supporters invalidate the thesis?

Almost all banks are insolvent, so no bank is safe

The core cause of this impending disaster can be linked to the bankruptcy of almost all companies. every bank.

But how is that possible? How can such strange claims be fundamentally verified? This is a result of the Federal Reserve’s interest rate policy. As interest rates have soared, the value of government debt held by banks has subsided substantially enough to plunge bank reserves into a sea of ​​deficit.

So what is the biggest lesson from this pulpit of doom and gloom? It is this: a big implosion is coming, and it is happening this year.

“But wait a minute.” The moderates say this: “Not that fast. that It’s bad, even if the results aren’t that great.”

First, let’s look at it objectively. What does the tech say?

The Macro Perspective: Too Big to Fail and Community Banks

The risk of a few more bank failures is plausible (since, on average, regionally, there tend to be a few per year), but it is a different matter if a series of failures triggers a systemic banking crisis. Could that happen?

Chart 1. Percentage chart of small and large banks and the S&P 500. Note their rapid recovery following the March 2023 banking crisis (which occurred quickly due to the Federal Reserve’s bank term funding program, which ended on March 11, 2024).Chart source: StockCharts.com. For educational purposes.

The collapse of Silvergate Bank, Silicon Valley Bank (SVB), and Signature Bank last year would have triggered an even bigger crisis had the Federal Reserve not intervened in the Bank Term Funding Program (BTFP). BTFP aimed to stabilize the banking system by providing loans to banks and credit unions against collateral such as U.S. Treasury bills and par value mortgage-backed securities.

Looking at the chart, you can see how fast the large banks (using KBE and $DJUSBK as proxies) and regional banks (using KRE as proxies) have experienced a recovery. Compared to a year ago, large banks are outperforming the S&P 500 ($SPX), while laggards and regional banks are within positive territory.

The channel is broken

Chart 2. KBE daily chart. Price just broke below the uptrend channel, but the decline in momentum may have predicted this decline a month ago.Chart source: StockCharts.com. For educational purposes.

Momentum at KBE, an industry proxy for large banks, began hinting at a bearish momentum gap in early March based on Chaikin Money Flow (CMF). Extreme downward slope into negative territory. The gains for the S&P 500 were tepid and steady, but the underperformance for the Dow Jones US Bank Index was as muted as foreboding.

KBE finally fell below the upward trending price channel., the next set of support levels are in the $41, $39, and $37 range. The current decline was triggered by Wednesday’s negative Consumer Price Index (CPI) result, with Producer Price Index (PPI) figures due to be released soon on Thursday. How low can KBE drop? Pay attention to the current earnings season. Read the numbers, analyze the guidance released by the CEO, and consider some analyst forecasts (if reasonable enough) rather than just following or repeating mainstream opinion.

What about local banks?

Chart 3. Daily chart of KRE. Local banks are significantly underperforming large banks in the banking sector. Chart source: StockCharts.com. For educational purposes.

In an article dated March 27th, KRE’s imminent crash: What this new crisis means We predicted this decline based on similar technical and baseline assessments. You can check the difference between KRE price and CMF. However, what is not discussed is that KRE has underperformed (extremely) compared to the large banking sector ($DJUSBK).

Potential support levels are outlined in the chart above ($45, $44, $43 ranges) despite the continued decline, any further plunge will be determined by fundamental circumstances. As with KBE, keep an eye on numbers and news from the current earnings season.

Is an implosion approaching?

In the shadow of last year’s bank failures, some economists on the edge of mainstream forecasts ominously predicted a widespread banking collapse in 2024. This dire prediction is rooted in the belief that almost all banks are on the verge of bankruptcy. The Fed’s interest rate policy has reduced the value of government debt holdings, making bank reserves vulnerable.

Of course, this may all be cautionary rhetoric. However, if it does play out partially or fully, technical levels and indicators can help you navigate the situation if you decide to take action, whether bullish or bearish.

disclaimer: The content of this article is the opinion of the author and does not constitute financial advice. StockCharts.com does not support or endorse any claims made in this article. You should not use any of our ideas and strategies without first evaluating your personal and financial situation or consulting a financial professional.