Regional Bank Surprise Raises Questions About a Bad Loan Tipping Point
News that send Zion Bankcorp and Western Alliance Bancorporation reeling could drive a larger sell off next.
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Increased volatility, frothy action in secondary stocks and a parabolic move in precious metals were warning signs that the market was in danger of corrective action. The selling pickup on Thursday with small caps, and the recent winners are suffering the brunt of the damage.
The senior indices only saw minor declines, with the S& P500 dropping 0.65% and the Nasdaq 100 (QQQ) down only 0.3%. The Russell 2000 (IWM) lost over 2% but it was the banking sector that suffered the most. The SPDR Select Sector Financial ETF declined 2.8%, despite solid earnings reports from major banks.
As is often the case, the catalyst for the selloff was not anticipated. Two regional banks — Zion Bankcorp (ZION) and Western Alliance Bancorporation (WAL) — fell over 10% as large loans to one major borrower were charged off. The regional bank index (KRE) dropped 6.5% and took out some significant support on the chart.
The issue isn’t just these two banks, but the possibility that there are other bad loans on the books that have not been recognized but may reach a tipping point if the economy slows down further. Memories of the Silicon Valley Bank debacle are still fresh.
The bigger question now is whether there is deeper corrective action to come, or was this just another convenient excuse to sell some stocks that have made unsustainable moves. One positive aspect of the action was the relative strength of semiconductors (SMH) , Oracle (ORCL) , Nvidia (NVDA) and other names leveraged to AI.
Rather than hit the "sell all" button, investors rotated into some of their favorite AI names. Breadth was around three-to-one negative, but it was secondary stocks with weaker fundamentals that suffered the most.
Recently, the market has done a very nice job of bouncing back from days like this, but the increased volatility tends to undermine confidence and will be tougher to recover from the more times it occurs.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
