How High Can Banks Bounce?

Key Takeaways

• Monitor market breadth carefully: Only 55-60% of S&P 500 stocks are above their 200-day moving average, significantly lower than the 80% seen in late January, signaling a less healthy rally despite index gains.
• Watch for banks to confirm the narrative: Regional and community banks have retraced only 10% of their February decline while the S&P has retraced 80%, which is historically unusual and suggests underlying financial stress concerns aren't truly resolved.
• Be cautious about anticipating Fed rate cuts: Historically, Fed pauses have been bullish, but the actual cutting cycle has led to trouble (see 2001 NASDAQ collapse and 1991 Nikkei reversal), so avoid celebrating near-term rate cut expectations.
• Track the yield curve uninversion as the real danger signal: An inverted curve can coexist with strong equity rallies, but when the curve starts to steepen/uninvert, that's when recession risks typically emerge within months.
• Don't follow the crowd into crowded trades: While gold and Bitcoin are attracting attention with breakout moves, positioning data shows they're not yet in 90th+ percentile crowding, suggesting the moves may have room to run before the consensus gets too aggressive.