Absurd Political Debates On The Palestinian Question And The Inflation Question Grip World Capitals: The Action For October 11, 2023

The Times details the Hamas horror and the arguments advanced by progressives to blame Israel but a similar absurdity is playing out across Global Wall Street as persistent inflation fails to move the bulls off their root belief in economic resilience. A war in the Middle East is just a matter of time and so is a recession in profits if not in employment, and both signal lower valuations ahead. But the bulls are in control as the debate flares up, and the S&P 500 likely rises over the near term, only to come down again later this week as fears over worse data and a Fed response reinvigorate the bears,

The bulls have control for the moment as several indicators reveal confidence in corporate earnings and the macro environment. These include:

  • S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market higher.

  • Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.

  • Russell 2000 Technicals: Small stocks are breaking out and reflect surging confidence in economic growth.

  • Gold Prices: Rising gold prices reflect expectations of of lower interest rates more so than fear about geopolitical risks, which is on net good for equities.

But based on the action yesterday and overnight there are numerous risks the bulls need to climb over, including:

  • EPS Estimates: In the last week Wall Street analysts lowered profits forecasts for many firms in the S&P 500.

  • Shanghai Composite Technicals: Chinese equities are trading poorly and that bodes ill for the global economy.

  • MOVE Index Of Bond Volatility: Fixed income volatility is rising and implies higher inflation expectations and higher interest rates to come, potentially bearish for equities and the global economy.

  • Tin Prices: Tin is broadly used across goods and industry and falling prices typically signal worsening growth prospects.

  • Geopolitical Issues: Developments around Israel are a clear negative for equities.

My current positions reflect my intermediate-term bullish forecast, and include 3M (MMM), Pfizer (PFE), and a large position in UPRO that is largely hedged by an offsetting position in SPXU, which nets out to a long position in equities.

Warmth Is Wealth