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Despite the banking crisis, the Fed raised interest rates by a quarter of a percentage point, bringing the benchmark funds rate to a range of 4.75% to 5%, the highest since October 2007. Concerns over the federal funds rate climbing higher than previously predicted and tighter lending by banks following the worst banking crisis since […]
4 Best Pharma Stocks to Buy for the Long Haul Read More »
Exchange-traded funds (ETFs) have become an essential part of investing.
Not only do they allow you to diversify with strong stocks, but they’re also relatively inexpensive. However, as with any investment vehicles, there are some common misconceptions that we’d like to dispel.
No. 1 – ETFs Are Inherently Risky
All investments carry risk. All risk with an ETF is tied to its underlying holdings, or the assets the fund invests in. For example, an international ETF or managed fund may have higher risks than a U.S. investment grade corporate bond ETF. But that risk is not related to whether you choose to hold a managed fund or an ETF, noted Blackrock. At the same time, as we noted, ETFs do offer greater diversification than an individual stock, which may help reduce risk in a portfolio.
No. 2 – ETFs Are Limited
That’s not true at all. In fact, ETFs actually come in hundreds of “flavors.” You can gain access to specific industries and, or countries. You can also use some ETFs for broad investing for all countries, and most of the holdings in individual indices, such as the QQQs or the DIA. Or, you can buy a healthcare ETF, which offers broad diversification with pharmaceutical, healthcare, and biotech stocks, for example. You’re never limited…
No. 3 – ETFs Don’t Pay Dividends
Again, not true. Look at the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ), for example, which carries a balanced portfolio of large-cap value stocks, while also providing investors with a 10% yield.
With an expense ratio of 0.04%, the ETF offers exposure to some of the biggest and most stable companies in the market. Top holdings of JEPQ include Apple (AAPL), Microsoft (MSFT), and Nvidia (NVDA), which has climbed nearly 30% this month.
This image is not a recommendation or individual advice. Please see bottom disclaimer for additional information, including Magnifi Communities’ relationship with Magnifi.
This exposure, coupled with a steady income from dividends is proof there is an ETF out there to satisfy whatever strategy you choose, including income investing.
No. 4 – All ETFs Have Low Expense Ratios Debunked, different funds employ different strategies and sometimes strategies or fund managers demand higher expense ratios than other funds. The AdvisorShares Ranger Equity Bear ETF (HDGE) has an expense ratio of over 4%, much higher than that of your run of the mill ETF. Typically, a range of 0.5% to 0.75% is considered fair and a ratio above 1.5% is considered high.
This image is not a recommendation or individual advice. Please see bottom disclaimer for additional information, including Magnifi Communities’ relationship with Magnifi.
Another reason for this difference is some funds are actively managed and others are more of the set and forget variety, so the fund managers need to do less work in order to let the fund’s strategy play out.
No. 5 – Net Asset Value Isn’t Worth Knowing
One of the key terms to understand is Net Asset Value (NAV), as we’ve noted in prior articles. The NAV is the sum of all of the LIT ETF assets (the value of its holdings in cash, shares, bonds, and other securities), less liabilities, divided by the number of shares outstanding.
For example, let’s say an ETF has $10 million in securities, $4 million in cash, $2 million in liabilities, and has a million shares outstanding. That would give the ETF a net asset value of $12, calculated with: ($10 million + $4 million – $2 million) / $1 million, which is 12. With that information, an investor can determine if an ETF is worth considering.
Fidelity puts it this way…
“It’s basically an indication of the fair value of a single share of the fund. It provides investors a reference point around which they can gauge any offers to buy or sell shares of the fund. If you own 100 shares of an ETF whose NAV is $50, and someone offers $55, you have a solid basis from which to judge their offer. In reality, though, most ETFs trade much closer to their NAV.”
Now that we have put those common misconceptions to bed, we are ready to get started on our investing journey. With a little assistance, of course…
When you follow this link, you’ll be able to sign up for additional, VIP content from All Star Funds. Along with all our bonus, VIP content you’ll also be able to start a trial of the powerful AI investment software, Magnifi Personal.
The insights in these articles are often derived from a conversation with Magnifi Personal, allowing us to bring quality financial insights to our readers. Give it a try and see how it can help you improve your investing today!
5 Myths About ETFs You Can’t Afford To Miss Read More »
It’s been a choppy start to the year for the major market averages and while many large-caps have begun new uptrends, several small-cap names remain stuck in the mud, unable to gain much upside traction.
In some examples, this underperformance is justified with many businesses not being worth owning and or having weak balance sheets.
However, there are a few small-cap names with solid business models and decent balance sheets generating free cash flow, and contrarian investors are being presented with an opportunity to invest in these stocks at a very reasonable price, especially given that they have robust growth plans.
In this update, we’ll look at two stocks worthy of adding to one’s watchlist:
MarineMax (HZO)
MarineMax (HZO) is a small-cap name ($600 million market cap) in the Retail-Leisure Products industry group, and is the world’s largest lifestyle recreational retailer of boats and yachts plus yacht concierge and superyacht services.
The company was founded in 1998 in Clearwater, Florida, and has grown through strategic acquisitions to now control a footprint of 125 locations globally, including 57 owned and operated marinas and 78 dealerships.
Some of the company’s recent acquisitions include BoatYard.com and Boatzon, Fraser Superyacht Services, MidCoast Marine Group LLC, and IGY Marinas.
Understandably, many investors might not be that interested in owning a business that derives its revenue from recreational boat and yacht sales during a period where consumers are pulling on their spending and in what appears to be a recessionary environment with increasing layoffs.
However, it’s important to note that MarineMax has improved its mix over the past several years so that just ~73% of FY2022 revenue came from new boat sales, with the other 27% including parts/accessories, finance/insurance, brokerage, service/repairs/storage, and used boat sales.
It’s also worth noting that although 73% of revenue from new boats is still quite significant especially if we saw sales pulled forward in the pandemic, MarineMax does skew towards more affluent consumers vs. lower-end consumers that have been hit the hardest.
In the company’s most recent Conference Call, the company noted that it has “a pretty resilient wealthy client it’s lending to”, suggesting that while the macro environment is impacting buyers, MarineMax is more insulated than it might appear on the surface.
So, why even bother with a volatile small-cap name that relies primarily on new boat sales in a tough macro environment?
(Source: FASTGraphs.com)
Although MarineMax could see continued downward pressure on earnings and annual EPS is expected to decline from a peak of $9.06 (FY2022) to $6.94 in FY2022 and $6.24 in FY2023, the stock is trading at just ~4.5x FY2024 earnings estimates which are expected to mark trough earnings at a share price of $28.00.
Not only is this one of the lowest earnings multiples for any publicly traded non-commodity stock based in North America, but the current PE ratio is over 60% below its historical multiple of 11.9x earnings.
Even if we use a 40% discount to this multiple to adjust for the more difficult macro environment (7.1x earnings vs. 11.9x earnings), I see a fair value for the stock of $44.30 per share, pointing to 59% upside from current levels.
Obviously, investing in sub $1.0 billion market cap names is not for the faint of heart and there is a higher risk to owning a name that some funds may not touch due to its relatively low daily average volume.
For this reason, I believe in sizing the position conservatively at less than 3.0% of one’s portfolio.
That said, while HZO may be volatile and may be higher risk than the average mid-cap or large-cap name, I see the risks as quite low given that it’s down ~50% from its highs and trading at its lowest valuation in years despite just coming off a record FY2022 with 300 basis points of gross margin expansion and 15% revenue growth.
The Joint Corporation (JYNT)
The Joint Corporation (JYNT) is a micro-cap stock ($250 million market cap) in the Medical-Services industry group that has been one of the best-performing stocks since its IPO debut before its recent 80% correction.
This was evidenced by an ~800% rally from its high in 2015 ($12.99) to its recent all-time high made last year of $111.06, driven by strong unit growth across its system and steady growth in revenue per share.
For those unfamiliar with what the stock does, it is a chiropractic franchisor and operator in the United States with a private pay, non-insurance cash-based model.
The company has grown from eight clinics in 2010 to over 830 clinics as of year-end 2022, with an ~85% franchised model.
The company collects a 7.0% royalty on sales from franchised clinics and a national marketing fee of 2.0% of gross sales. It also receives a fee of ~$40,000 for each franchise sold directly for single-franchise purchasers, making this a very attractive business model.
Since FY2015, Joint Corporation has grown its annual revenue from $13.8 million to $101.9 million, making it one of the highest growth stocks in its industry and across the entire market.
In the same period, it’s enjoyed a 1100 basis point improvement in gross margins (90.4% vs. 79.6%). Finally, it has increased its annual EBITDA to over $10 million despite a relatively modest footprint to date and revenue base.
Unfortunately, while this growth has been impressive and the stock massively outperformed during the bull market off the March 2020 lows, this performance has reversed and the stock has found itself over 80% off its highs.
The culprit for this underperformance is that the stock was priced for perfection heading into the peak for the major market averages in Q4 2021 at 20x sales, an insane multiple even for a high-margin business like Joint Corporation.
However, since then, the stock has reverted to a much more reasonable valuation of ~2.0x FY2023 sales estimates ($130 million) and less than 1.8x FY2024 estimates.
This is a significant discount to its historical revenue multiple of 4.1, even if this is a less attractive environment for owning risky stocks when one can scoop up a risk free ~4% return in treasury bills.
So, why own the stock here?
(Source: FASTGraphs.com)
While Joint Corporation is quite volatile, management is confident that it’s in the earlier innings of its growth story with the potential to grow to well over 2,000 clinics domestically.
This would push annual revenue to well over $300 million, making Joint Corporation one of the cheapest publicly traded franchisors if it stays at these depressed levels. Plus, the stock is finally becoming oversold, setting up a buying opportunity from a technical standpoint.
Based on what I believe to be a conservative multiple of 3.0x forward sales and FY2023 estimates of $8.50, I see a fair value for JYNT of $25.50, pointing to 52% upside from current levels.
So, if the stock were to head back towards its recent lows near $14.50, I would view this as a buying opportunity.
While several names in the large-cap space are on the sale rack currently, with Enbridge (ENB) being one attractive name that’s offering one of the best yields in the market and trading in the lower end of its 2-year range, I am always happy to add some small-cap exposure to my portfolio to add additional torque.
The key, however, is that these businesses are trading at a deep discount to fair value and offering a margin of safety to adjust for their higher volatility and increased risk given that they’re much smaller companies.
Today, two names that stand out are JYNT and HZO, and the recent pullback has set up low-risk buying opportunities in both names.
So, if I were looking for a way to diversify my portfolio with two names offering growth at a reasonable price, I see JYNT and HZO as solid buy-the-dip candidates below $28.00 and $14.50, respectively.
Disclosure: I am long HZO, ENB
Taylor DartINO.com Contributor
Disclaimer: This article is the opinion of the contributor themselves. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information in this writing.
2 Small-Caps For Your Watchlist Read More »
Despite the current banking crisis, the Federal Reserve went ahead with a 25-basis-point interest rate hike, bringing the federal funds rate to a new range of 4.75% to 5%, the highest since October 2007. With the federal funds rate likely to climb higher and the banks likely to tighten lending, there is a significant risk
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Oil is going to $50.
Or it’s going to fall all the way down to $20.
Or is it?
If you follow oil prices at all, the last few weeks would have you believe that the world is awash in oil all over the world, demand was declining, and renewable energy was cheap and easy to build.
None of that is the truth.
Here’s what’s actually happening…
And how you can play it.
The International Energy Agency said earlier this month that it expected oil demand to surge, thanks to increased air travel and the continued reopening of China. As a result, the agency expects global demand to exceed supply starting in the second half of 2023.
More demand than supply leads to higher prices, according to any introduction to economics textbook.
This is not going to be a short supply-demand cycle either. While I am all too aware that the pundits and alleged energy experts would have you believe that renewable energy will be our primary fuel source and that we will all drive an electric vehicle by next Christmas, that is not the case.
According to the Energy Information Agency here in the United States, we will still use more oil and more gas than we do renewable energy. In its 2023 Energy market outlook, the agency said that while renewable energy will be the fastest-growing fuel source in the coming years, we are still several decades away from it being the primary fuel source.
The Energy Information Agency also suggested that while government officials are talking about 100% electric vehicles, the actual percentage of electric vehicles sold will be about 30% of all cars purchased if oil prices are at a high level, or less than 15% if gas is cheap.
All the campaign trail and Green New Deal hollering about renewable energy and EV usage simply are not true—we will be using oil and gas for decades.
If I am right about that (and I am), then oil and oil-related equities are cheap.
I am not the only one who thinks this is the case. A guy you might have heard of named Warren Buffett has a pretty decent record of identifying undervalued industries and companies. And he has been buying energy stocks hand over fist in recent months.
Buffett’s largest recent purchase has been Occidental Petroleum (OXY), and he keeps buying more shares when the price falls: last week, he added an additional $466 million worth of shares to his position. The week before, he spent $354 million on Occidental shares.
Berkshire now owns about $12.5 billion worth of Occidental shares.
Buffett is not buying Occidental and its collection of oil-producing, storing, and marketing assets because he thinks oil’s long-term price will decrease.
Occidental just raised its dividend by 38% and announced a new $3 billion stock buyback. The company also plans to use some of its free cashflow to redeem its preferred stock. This is on top of the $3 billion buyback plan Occidental completed in the fourth quarter of 2022.
Apparently, Ocidental’s board does not think oil prices are falling anytime soon, either.
Executives at Devon Energy (DVN), the large oil and gas exploration and production company, also have signaled with their checkbooks that they think oil and gas prices will move higher and create free cashflow for the company.
CEO Richard Muncrief has made open market purchases of almost $1.2 million of Devon Energy shares in the past two weeks. The company’s chief operating officer bought almost $1 million last week as prices fell. And one of the directors of its board bought just shy of $250,000 worth of stock.
Devon Energy is a free cashflow machine that generated $6 billion in excess cash last year.
The company uses the cash to reward shareholders. It just raised the dividend, and the stock now yields more than 10% after the recent pullback.
Devon has also been buying back a lot of stock, with $700 million left on a $2 billion buyback authorization. The company increased the buyback amount twice last year; additional increases in 2023 will not surprise me.
Insiders are not buying because they think oil and gas prices will decrease.
Both the International Energy Agency and the US-based Energy Information Agency think oil and gas demand will decline over the next several decades.
Warren Buffett is making a massive bet on oil prices rising long term.
Energy prices may be volatile, but buying energy companies and assets at current valuations should deliver spectacular long-term returns for patient-aggressive investors.
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The Truth About Oil Prices – and How You Can Profit Read More »
2022 was a terrible year for the media industry companies.
This was because competition among streaming services has come to an all-time high and consumers are getting pickier about their number of subscriptions. On top of that, companies are contending with lower ad revenue and more cord cutting.
When Netflix (NFLX) reported it lost subscribers in the first quarter of 2022—the first time in more than 10 years—the news sent a shockwave throughout the sector. The company blamed heightened competition, and began exploring a cheaper, ad-supported option for customers. Since then, other media companies have followed suit.
The video streaming market is currently being reshaped after last year’s collapse in investor sentiment toward these companies.
Both Netflix and Disney (DIS) have changed chief executives and stripped subscriber growth forecasts from their results. The focus now is solely on profitability, which may put Netflix ahead of its competition…
Netflix is staging a recovery from the share price slump suffered at the beginning of last year. In April 2022, its market capitalization was 70% below its 2021 peak. However, after a series of positive results, the company’s stock has regained some of its lost luster.
In the fourth quarter of 2022, Netflix added 7.66 million net subscribers, well ahead of guidance of 4.5 million added, to reach 230.75 million subscribers. This marked the second straight quarter of subscriber growth, and a 4% year-on-year increase. That’s quite a change from the two quarters of subscriber losses at the beginning of last year which led to the steep selloff in the stock.
The stepping down of founder Reed Hastings is highly symbolic of the company’s move away from a growth-at-all-costs strategy. The new management team, with co-CEOs Greg Peters and Ted Sarandos, is taking some steps to improve the company’s cash flow. For example, Netflix has plans in place to cut down on password sharing.
While this may lead to cancellations over the short-term, it’s a smart longer-term strategy. Despite the risk of losing some customers, the move should turn out to be cashflow positive.
Netflix estimates around 100 million people use its service without paying for it. That huge number is why many Wall Street analysts are confident a large chunk of money will come to Netflix once these viewers become monetized. FactSet reports that estimates for Netflix’s free cashflow will more than double to $3.15 billion this year, and then rise again to $4.7 billion in 2024.
The biggest problem for Netflix’s cashflow though remains the cost of developing content and using technology. In 2022—despite trying to keep costs in check—the company spent 19% more on technology and development.
To bring this under control, Netflix has been experimenting in Japan with the usage of generative artificial intelligence (AI). Earlier this year, it produced an anime show called Dog & The Boy, which caused an outrage among some because it incorporated AI-generated art.
Netflix’s Outlook
While Netflix’s outlook is improving, there is no denying the U.S. streaming market is saturated. That means if any further growth does come from Netflix, it will come from overseas. Already, Netflix has more customers outside the U.S. than inside the country.
A particularly strong region for Netflix is Asia. The market research firm Ampere Analysis explains that: “[Asia-Pacific] is likely to represent Netflix’s biggest growth potential in the future, accounting for over 60% of net additions to its global subscriber base over the next five years.”
Although that pricing in places like India is far below pricing here in the U.S., Morningstar forecasts that—on the international side—increased customer penetration will generate average revenue growth of 11% in Europe, 7% in Latin America, and 15% in the Asia-Pacific through 2027.
Overall, Morningstar forecasts average revenue growth of 9% for Netflix, with the operating margin expanding to 25% in 2027 from 21% in 2021, after dipping to 18% in 2022.
Netflix has been targeting $3 billion-plus free cashflow in 2023, versus $1.5 billion in 2022, as the five-year build of the studio to produce a majority of original titles (60% of content assets) are now past the most capital-intensive part of the process.
The main takeaway is that Netflix is now a company that has swapped its role as a disrupter for that of being the dominant incumbent… it is now the only profitable big streaming service in the world, with a subscriber base of 231 million and annual content budget of roughly $17 billion.
All of the factors discussed make Netflix a speculative buy anywhere in the $290 to $320 range.
Regulators recently seized Silicon Valley Bank due to concerns about its financial health and compliance practices, leading to investors losing confidence.As a result, funds and investments tied to the bank could be vulnerable to significant losses and market volatility.But this new AI investing tool can help you figure out if your investments are at risk, what to do about it, and find new opportunities for you to invest in.Click here to see how.
Netflix is Back on Top Read More »
Amidst major macroeconomic uncertainties, it can be challenging to identify the top-performing tech stocks that are poised for long-term growth. However, Nokia Oyj (NOK), a global leader in network infrastructure and telecom solutions, seems to be an attractive investment now. In this article, I will discuss the reasons why I am extremely bullish on this
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My eyes are jumping all over the screen as I scan for opportunities in the market.
Given we appear in the midst of a slow motion train wreck that is the global banking crisis, it probably makes sense to pull back for a big picture look at the macro-economy and funds that represent major asset groups. To say it’s chaotic and confusing would be an understatement.
Bonds have rallied sharply (price up, yield down) and commodities are tanking; both suggesting recession is looming.
On the other hand, equities and major currencies have held steady indicating little to no concern for a broad economic slowdown or turbulence. Large-cap tech has held up especially well; Invesco QQQ Trust (QQQ) is actually up 4.3% since Silicon Valley Bank went into receivership on March 9.
The biggest moves have come in the bond market as forecasts for the path of interest rates have been abruptly recalibrated. We will get some clarity on Wednesday when Powell and the Federal Open Market Committee (FOMC) make a decision on whether or not to continue raising rates.
Just 10 days ago a 50 basis point hike was all priced in. Now, there is a 50% chance it will be just 25 bps and a 15% chance there will be no rate hike at all. Investors had been hoping and begging for a Fed pivot, I don’t think many people thought it would be major bank failures that would cause the pause. No one expected a bank to fail for owning too many ‘risk free’ long-term bonds such as treasuries and mortgage-backed securities.
The change in expectations can clearly be seen in the yield curve; that is the relative interest rates across maturities. Three weeks the spread between the 2-Year Treasury Note, which was yielding 4.67% and the 10-Year Treasury, which was 3.55%, was 1.02 basis points. That was the largest inversion on record. On Monday morning, the 2/10 spread was down to just 15 basis points.
The inverted yield curve, which is typically a signal of an upcoming recession, has been one of most highly tracked and hotly debated aspects since the Fed started hiking rates a year ago. If you recall, the curve first inverted last April. The recent price movements also reflect the largest and quickest reversion or flattening of the curve in history.
The sudden change in expectations can be seen in the Fed Futures, which had priced in a terminal or final peak in rates at 5.67% in August of this year to having already peaked at 4.99% earlier this month.
The expectations seem to be if the Fed does hike again on Wednesday, that it should be the last rate hike for this cycle. The theory being that fall-out from the banks will take the form of stricter lending standards, more regulation, and the need to offer higher returns on short-term deposits to stem withdrawals.
This will have the effect of tight financial conditions, which should help subdue inflation, the Fed’s primary goal.
This, in turn, should cause a further flattening of the yield curve, back to a normalization in which longer-term bonds pay a higher interest rate than shorter-term.
Two popular bond ETFs I’m keeping an eye out for are the iShares 1-3 Year Treasury (SHY), which is a proxy for the 2-year and the iShares 20+ Treasury (TLT), which is a proxy for the 30-year bond. Both are extremely liquid, which is crucial during these turbulent times and both have low fees of just 0.15%.
You can see SHY has provided a cumulative return of 1.42% over the past 52-week, with all of that coming from yield, which has more than offset the decline in the underlying price.
Meanwhile, TLT lost a cumulative 16.85% over the past 52-weeks as their lower yield could not compensate for the decline in price.
The rate at which this recalibration occurred qualified as a 10 sigma move – that would be 10 standard deviations from the 12 month expectations – and is leading many analysts to believe this is the end of the tightening cycle and we will see a further normalization of the yield curve in the next year or so.
One way to play this would be to go long on TLT, while selling, or shorting, SHY. For those looking to limit risk, and possibly add some leverage for higher returns, using options tied to TLT and SHY could make sense.
Both have very liquid options with high daily trading volume and tight bid/ask spreads. To set up a position with a well defined risk one should consider buying or using debit option strategies, which limits the potential loss to the cost or amount spent on the options.
If one is expecting a further reversion from the inversion, you could buy calls on TLT, which will benefit from a rise in price/drop in yield versus buying put options on SHY.
While both TLT and SHY should trend in the same general direction such a position will benefit if TLT rises more relative to SHY. This type of paired action also provides a hedge against a sharp adverse move in one direction.
You can use Magnifi Personal to find and analyze these funds, as well as other bond based ETFs such the more obscure Invesco Senior Loan (BKLN), which tracks an index of leverage loans tied to corporate bonds.
Once you find other options you are interested in, you can even have your personal AI investing assistant compare investments, highlighting the important data points of each selection.
Let Magnifi help you unlock a level of investing you had only dreamt about before. Now the power of an AI assistant is in the palm of your hand.
2 Bond Funds For Playing A Reversion To The Inversion Read More »
According to some doomsayers, the stock market is on the brink of a crash, and the collapse of Silicon Valley Bank (SVB) is being considered as a potential “Black Swan” event.
They believe it could trigger a domino effect similar to the Lehman Brothers collapse in 2008. There are already indications of this, as the failure of SVB has had a ripple effect in Europe, with the second largest Swiss bank, Credit Suisse, also being hit.
Source: TradingView
In the comparative chart above there is a year-to-date dynamics of S&P 500 Financials index (SPF, black), the iShares Global Financials ETF (IXG, green), SVB Financial Group (SIVB, red), Credit Suisse (CS, orange), JPMorgan Chase (JPM, blue) and Bank of America (BAC, purple).
On the chart, all of the lines indicate negative performance, with each one below the zero mark. Indeed, SVB and CS are the ultimate losers, while BAC is also suffering a significant loss at -17.01%. Meanwhile, IXG, JPM, and SPF fared slightly better, with losses of -6.43%, -6.85%, and -10.35%, respectively.
This indicates that banking stocks around the world are losing ground following the trigger from SVB, as seen with the decline in IXG and the top two banks in the US.
Source: TradingView
The chart for the S&P 500 Financials index (SPF) indicates the possibility of continued weakness. It exhibits a classic pattern, with two large red moves downwards connected by a consolidation area in green. This consolidation area includes two upward moves (green i and ii), which form a Rising Wedge pattern in green.
The price target for the second red leg downwards is set at $428 (leg 2 = leg 1), which is a drop of almost 17% or $85 from the current level. With a year-to-date loss of 10%, this further decline would add to the pain.
The price has already covered over 50% of the second drop by reaching the significant support area created by the high points in 2018 and 2020, as well as the low point in 2022.
The RSI has already dropped below the support level of 50, indicating a shift towards a bearish trend.
Once the price breaks below the support area formed by the peaks of 2018 and 2020 and the valley of 2022, there are no other significant supports until it reaches the valley of 2020 at $291. This collapse could happen quite rapidly, as seen in 2020, and would result in a loss of over 43% from the current level.
The financial sector makes up 12% of the broad S&P 500 index. Therefore, the descent of the former for 17-43% would likely have a negative impact on the overall stock market.
Source: finviz.com
The positive momentum in the technology sector, which accounts for 27% of the S&P 500, helps to mitigate the negative impact of the financial sector’s decline and prevent a significant collapse in the broad index. We can see green spots in the sea of red though in the map of 1-month performance above.
Source: TradingView
Compared to the financial sector’s graph, the chart of the broad index looks much better. In January, the price broke out of a large correction (indicated by orange trendlines).
Currently, there is a textbook pullback in progress as the price retests the former orange trendline resistance, which has now become a support. The collapse of SVB caused the index to briefly puncture the trendline, but it was quickly pushed back up by technology stocks.
For continued growth, the RSI needs to overcome the resistance at the 50 level. According to a conservative approach, the price should retest the all-time high at $4,819.
If the trendline support is broken and the RSI fails to break into the bullish area, the red-colored scenario could become a reality. This would follow a similar structure as the SPF chart with two legs down in red. The main downside target for the broad index would be located at $3,013, which is equal to the first leg down.
In the worst-case scenario, a crash similar to that of 2020 could bring the price down to the valley of $2,192.
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Intelligent trades!
Aibek BurabayevINO.com Contributor
Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
Was The Collapse of SVB a Black Swan? Read More »
Normally sleepy regional banks have been wildly active in options trading after the SIVB crisis from last week. First Republic Bank (FRC) is a regional bank that investors have been very concerned about, with the stock down over 70% in a week. Despite bankruptcy concerns, some options traders Brokers don’t typically advertise “Income Accelerator Accounts…”
Trade of the Week: First Republic Bank Read More »
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Suite 300
Boulder, CO 80301
Charlotte
212 S. Tryon St
Suite 1750
Charlotte, NC 28281
Mumbai
10th Floor Aston Building
Sundervan Complex Rd
Andheri West
Mumbai 400053
Bengaluru
570 1st Cross
2nd Floor
Koramangala
Bengaluru 560034
Mumbai
10th Floor Aston Building
Sundervan Complex Rd
Andheri West
Mumbai 400053
Bengaluru
570 1st Cross
2nd Floor
Koramangala
Bengaluru 560034
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