Head and Shoulders Topping Formation on the Russell2000

1. Mai 2023

The recent failure of First Republic Bank highlights the problems facing the US banking system. These problems include the continued increase of delinquency rates on Credit cards, Commercial Real Estate & Automobiles, as well as a decrease of commercial bank deposits and M2 money supply (-4.2% YoY). These problems, among others, are causing banking institutions to rein in their lending to build reserves and take on debt from the FED & FHLBs to meet deposit withdrawals. This reduces the profitability of banks and restricts credit into the economy, which reduces economic activity as a whole. The economy had already begun slowing heavily before the credit crunch began in March 2023, but the current business cycle downturn, combined with 3 large regional bank failures and rising continuing jobless claims, portend a severe & lengthy economic contraction. The Conference Board Leading Economic Indicators registered a -7.2% YoY Contraction recently. Since 1968, Any Conference Board LEI contraction of more than -2% YoY has never yielded a false positive in regards to a coming recession.

Over 40% of Russell2000 companies are unprofitable and over 24% of S&P500 companies are zombie companies. Markets are still very overvalued within the context of a 5% Fed funds rate, contracting earnings, a credit crunch, and ongoing quantitative tightening by the FED. The markets have been seeing less buying volumes as well as carving out a head and shoulders top on the Russell2000. Other problems facing the banks include the popping auto & commercial real estate debt bubbles, as well as increasing large corporate bankruptcies (The most since 2010 thus far this year). The IPO market is the weakest it has been since 2009 (by total proceeds), which is also hurting Investment banking profits. I see the potential for 5%-10% possible upside and 35%-50% downside for the Russell2000 & S&P500 over the next 9 -18 months.


Thank you for reading,
Alexander C. Lambert