Investors should watch for these 4 signals to know when the banking crisis is over for the stock market

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  • There are four signals investors should monitor to gauge if the banking crisis has ended, according to Fundstrat.

  • A decline in bond market and stock market volatility is key to signaling that the crisis has ended.

  • Fundstrat's Tom Lee recommends investors buy technology stocks to ride out the turbulence.

The ongoing banking crisis that has ensnared Silicon Valley Bank, Signature Bank, First Republic Bank, and now Credit Suisse, among others, has rocked stock and bond markets around the globe.

The surge in market volatility amid uncertainty in the viability of some sizable banks is bringing up bad memories from 2008 for some investors, but not all is lost, according to Fundstrat's Tom Lee.

In a Monday note, Lee said that the merger of UBS and Credit Suisse helped avoid what could have been a massive bank failure and sparked another confidence crisis in the stability of the global financial system.

As investors turn their attention to whether or not the Federal Reserve will hike interest rates at its FOMC meeting this Wednesday, Lee suggests investors follow these 4 market signals to determine whether the banking crisis is finally receding.

1. A decline in bond market volatility

Lee wants to see the MOVE Index, which measures bond market volatility similarly to the way the VIX measures stock market volatility, fall substantially from its current level.

"We have to appreciate that in the fixed income world, especially because of the move in volatility and the drop in liquidity, it's probably been like a Great Financial Crisis event in the credit markets. We saw last week a lot of large macro funds experience drawdowns that only happen in systematic-like events, so I think in credit there was something pretty big that happened," Lee told CNBC on Monday.

The MOVE index ended January at just below the 100 level, and has since surged to 180 on Monday. Lee would like to see the index fall back below the 150 level to signal that the banking crisis is nearing its end.

2. A decline in stock market volatility

Silicon Valley Bank set off a surge in volatility as investors sold first and asked questions later. The CBOE Volatility Index, or VIX, jumped from 19 right before the banking crisis started to as high as 30. The VIX has since leveled off, falling to about 24, but remains elevated.

Lee wants to see the VIX fall below the 20 level to signal that investors have put the banking crisis in the rearview mirror.

3. First Republic Bank crisis is resolved

According to Lee, the First Republic saga needs to end. "A rescue of First Republic would be important," Lee said.

Even after a $30 billion capital infusion from a consortium of large-cap US banks, the drama is not over for First Republic Bank. The stock fell another 50% on Monday following a report from the Wall Street Journal that big banks were in talks to provide another round of aid to stabilize the bank. That follows a fresh credit rating downgrade further into junk territory from S&P Global over the weekend.

4. Regional bank deposits stabilize

Lee wants to see deposits at regional banks stabilize following a bank run on Silicon Valley Bank.

In an age where investors can tap a button on their phone and move their money in an instant, it's crucial that confidence is shored up and that the run on Silicon Valley Bank doesn't spread to other regional banks.

Based on data from the Fed, regional bank deposits have remained stable, though the most recent data is as of March 8, which is the same day Silicon Valley Bank knocked down the first domino of this banking crisis with the announcement of its $21 billion bond portfolio sale.

Deposits have held steady at about $5.5 trillion across regional banks. As long as that number stays relatively flat in the next data release from the Fed, it would signal that bank deposit runs have not spread to community banks across the country.

Once these four signals are triggered, Lee believes it will be smoother sailing for the stock market, but in the meantime, he suggests investors buy technology stocks, which have been relatively insulated from the chaos and posting solid gains as the rest of the market flails in the last week.

Read the original article on Business Insider