Regional Banks Hit New Lows

The S&P 500 was nearly flat as it only fell 2 basis points. It is still near the February low as it will likely remain in a tight range until tangible news about the trade war comes out and the Fed updates its 2019 guidance.

VIX was down 3.77% to 20.65. The CNN fear and greed index increased from 10 to 11. Nasdaq was down 0.39% even though Apple, Facebook, and Tesla increased 1.09%, 0.35%, and 2.78%. Russell underperformed dramatically as it fell 1.55%.

Regional Banks - Terrible Market Internals

Peak to trough the Russell 2000 fell 24% in 2015-2016. Its decline is currently 17.3%. I doubt the Russell 2000 will surpass that 2015-2016 decline without the S&P 500 falling below its February low.

On a year to date basis, the S&P 500 is only down 0.86% while 80% of Russell 2000 stocks are down. 40% of Russell 2000 stocks are down more than 2% and 25% are down more than 3%. Over 60% of S&P 500 firms are down and 65% of Russell 1000 firms are down.

The point here is the market internals are very bad.

As you can see from the chart below, the large caps are outperforming the mid and small caps by 710 and 625 basis points.

Regional banks are in disaster mode.

The KBW regional bank index fell 2.7% on Thursday which pushed it below the October low. It is at $49.45, while the October 24th low was $50.82. Peak to trough, the KBW index fell 28% in 2015-2016.

Currently, the decline in the KBW index is 23%. This implies economic weakness similar to 2016 is almost fully priced in. If you are shorting the regional banks here, you are betting on at least a small recession sometime in 2019 or 2020.

Regional Banks - Utilities Rally & Financials Fall

The best sectors were utilities and consumer staples which increased 0.88% and 0.69%. Even on days when the S&P 500 doesn’t crater we’ve seen the ‘risk off’ trade power on.

Out of all the sectors, the utilities have seen the greatest multiple expansion in 2018. That’s mostly because utilities had low earnings growth. But it’s also because this was a year where ‘risk off’ dominated.

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