No ‘Guarantee’ But Yellen May Have Just Set a Trap for the Bears

With a nearly 85% probability of a rate hike on Wednesday, no one paying attention to the Fed Funds market was surprised by the Federal Open Market Committee’s (FOMC) decision to raise rates.

And as you probably already know, that quarter-point hike had little if anything to do with Wednesday’s late-day swoon. For once, Fed Chair Powell can smile because Wall Street isn’t blaming him for Wednesday’s beatdown. The credit for that fiasco goes entirely to Treasury Secretary Janet Yellen.

Powell did his best to reassure investors that the banking system was sound. He went so far as to say:

“You’ve seen that we have the tools to protect depositors when there’s a threat of serious harm to the economy. Depositors should assume that their deposits are safe.” [Barron’s]

Now, while Powell was reassuring Wall Street that the banking flood waters were receding, Yellen chimed in with her view of the banking sector; more specifically, she said this regarding the potential expansion of Federal Deposit Insurance Corporation’s (FDIC) coverage for deposits above a quarter million:

“This is not something we have looked at; it’s not something we’re considering. I have not considered or discussed anything having to do with blanket insurance or guarantees of more deposits.” [Barron’s]

Everyone’s favorite melodramatic hedge fund manager and investor, Bill Ackman, was so frustrated by Yellen’s comments that he took to Twitter to voice his displeasure, telling the Twittersphere:

“A temporary systemwide deposit guarantee is needed to stop the bleeding. The longer the uncertainty continues, the more permanent the damage is to the smaller banks, and the more difficult it will be to bring their customers back.”

My immediate thought to all of this is that barring a 2008-style banking collapse; there’s no way Yellen, Powell, or anyone with an ounce of authority is going to preemptively tell depositors, investors, bankers, or small businesses that they’re free to engage in whatever lending, borrowing, depositing practices they want without fear of loss, repercussion, or personal responsibility. Frankly, the mere thought that a regulator would come out and provide an explicit guarantee on all deposits at this stage of the game seems like wishful (and foolish) thinking.

If you want to guarantee an amount above $250,000, buying very short-dated T-bills is not too difficult. The monthly payroll debate is a tough one. The need to have more than a quarter million liquid and insured at all times may be why the option should be made available for depositors (or banks) to purchase additional FDIC coverage.

This debate around FDIC limits won’t be solved today, but I’m sure it’ll be turned into a political football in the not-too-distant future. Regardless, the trader in me will point to the bear flag on the SPDR S&P 500 Trust (SPY) as one possible reason sellers pounced so hard (albeit with the catalyst of Yellen’s comments) into Wednesday’s close.

While the SPY is still hanging out within the flag, there’s no denying this is a bit of an ugly chart. Downside support is still crystal clear between $378 and $380, but a break of this flag Thursday or Friday might be enough to give us a quick flush toward $378 that then traps the bears and ushers in a rally back toward $400 to $405.

The bottom line is I am short-term bearish based on Wednesday’s price action but expect a test or breach of $380 support to trap bears and set the stage for an end-of-month rally.