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Traders work on the floor of the New York Stock Exchange in New York City, March 20.BRENDAN MCDERMID/Reuters

Investors are growing fearful as the banking sector lurches from one crisis to the next, highlighted by First Republic Bank’s FRC-N free fall on Monday and the emergency deal over the weekend to merge Credit Suisse CSGKF with UBS.

But there’s an upside to this upheaval: Glum investor sentiment is reflecting the current bout of stock market turbulence, and that may be good news for anyone looking to take advantage of beaten-up stocks.

“We are keeping a close eye on our sentiment barometers. Some are starting to suggest that fear has gotten too extreme,” Lori Calvasina, head of U.S. equity strategy at RBC Dominion Securities, said in a note.

The Canadian banking sector has been hit by a gloomy outlook for the North American economy over the past year as central banks raised interest rates in a battle against inflation.

These stocks have taken an additional hit since the failure of Silicon Valley Bank this month rattled confidence in the financial system and are now trading near five-month lows.

Though the failure of SVB was initially seen as the result of bad bets on interest rates by one bank that specialized in lending to the tech startup ecosystem, additional turbulence in the sector has left investors wondering if others are at risk.

The share price of San Francisco-based First Republic Bank sank 47 per cent on Monday, hitting a record low amid efforts by larger U.S. banks to stanch the outflow of deposits and recapitalize the U.S. regional lender.

The UBS emergency takeover of Credit Suisse over the weekend, at a massive discount to the Swiss bank’s closing stock price on Friday, added to investor concerns. Though steady on Monday, the KBW Nasdaq Bank Index of U.S. lenders remains mired near 2020 lows and the share prices of the Big Six Canadian banks are down about 20 per cent, on average, from this time last year.

The weekend joint statement from central banks – including the Bank of Canada and the U.S. Federal Reserve – pledging to keep U.S. dollars flowing through the global financial system did little to ease fears.

“There is of course a lot of uncertainty and we shouldn’t be complacent,” Jack Allen-Reynolds, deputy chief euro-zone economist at Capital Economics, said during a conference call on Monday.

“At the moment, it doesn’t look like we are in a 2008 scenario,” he said, referring to the start of the Great Financial Crisis. “But that doesn’t mean that all of these problems are just going to blow over.”

There may be an opportunity here, though, given the tendency for investor pessimism to mark low points for the stock market.

According to the latest sentiment survey from the American Association of Individual Investors, for the week ended March 15, just 19.2 per cent of respondents felt bullish about the next six months. That marked the lowest reading in six months.

At the same time, 44.8 per cent of respondents felt bearish, marking a sharp increase from the previous week and offering a compelling sign that the failure of SVB struck a nerve.

The sentiment survey showed that net bullishness – or the percentage of bullish respondents minus the bearish ones – stands at about negative 29 per cent, which is at the low end of the historical range and offers a contrarian case for stocks.

Stocks are normally up about 15 per cent when net bullishness falls below negative 10 per cent, according to Ms. Calvasina.

In another indication that sentiment may have turned overly pessimistic, the ratio of puts to calls has risen toward its historical upper range, meaning that more investors are turning to put options to protect themselves from downturns.

“Although that indicator remains below last year’s all-time high, it’s still at a level that is typically followed by strong S&P 500 returns on a 12-month forward basis,” Ms. Calvasina said.

To be sure, the banking crisis could grow worse and the threat of a recession is building at a time when central banks remain focused on inflation, offering little reason for investors to feel upbeat.

But with investor sentiment already in the dumps, one ingredient to a rebound may have arrived.

Follow David Berman on Twitter: @dberman_ROBOpens in a new window

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