Banks pressure SPX500 trend

SPX500 Weekly Analysis

The SPX500 had charted a higher trough (HT) followed by higher peak (HP1). This put the index into uptrend. However, the latest chart action has charted a lower peak (LP). Some weakness has crept in, with market participants unwilling to take price higher than the previous higher peak (HP1).

The weekly RSI has oscillated around 50 (green rectangle), suggesting an equilibrium in momentum.

A higher peak (HP1) followed by a lower peak (LP), and a higher trough (HT) followed by another higher trough (HT1) suggests consolidation. The index is charting a symmetrical triangle (converging dashed red lines).

For the SPX500 to be supported by momentum, the RSI needs to meaningfully position itself above 50 for some time. This will support price and point to a breakout scenario, but we think we need to see performance improvement in the banking sector for this to happen.

US.BANKS Influence on SPX500

The top chart shows the SPX500 and the bottom chart shows FXCM's US.BANKS basket.

The US.BANKS basket comprises equal weights of:
* JPM.us
* BAC.us
* WFC.us
* C.us
* COF.us

In March this year, three small banks failed – Silvergate Bank, Signature Bank and Silicon Valley Bank. Regional banks also came under pressure and eleven of the largest US banks provided up to $30bn to support First Republic Bank.

There was a confidence crisis regarding the US banking sector, reflected by a sharp sell down in FXCM's US.BANKS basket (1). This pressured the SPX500 (2). Since then, there has been some stabilisation in the basket but ultimately it has charted a lower peak, which has influenced the SPX500 (green arrows).

Both instruments have downward sloped green trendlines. However, the US.BANKS trendline is steeper and it has underperformed the SPX500. The sector is still battling with confidence issues despite relatively good Q1 earnings by the large banks. The regional bank weakness is still an influence.

First Republic Influence on US.BANKS

The shares of First Republic, based in San Francisco, experienced a significant decline yesterday, plummeting by 49% and closing at an all-time low. The bank reported $104.5 billion in deposits during the first quarter, which is a decrease of $72 billion from the previous quarter.

While some banks have experienced significant declines, others have remained resilient. For instance, PacWest shares advanced by 24% during Tuesday's after-hours trading. It announced that its deposit balance had grown by $1.8 billion over the past few weeks. Similarly, Western Alliance saw its shares rise by over 20% following its earnings report last week, which revealed that it had experienced $3 billion in deposit inflows since March 20.

Other banks declined as well yesterday, but not to the same extent as First Republic. This suggests that investors are not overly concerned about the possibility of wider contagion. However, there is little doubt that there is pressure on the sector, which is a drag on the SPX500.