Courage And Despair Across Israel & Palestine Make The Middle Road Hard To Follow, And Global Wall Street Knows It: The Action For October 13, 2023
The Times carries a remarkably distrait set of articles this morning covering multiple dimensions of great and awful behavior and pointing to a fraught and volatile world with no solutions in sight. For Global Wall Street the question of where the global economy is headed is appropriately fraught too, and on the back of modestly good bank reports the S&P 500 is rallying this morning but highly likely to reverse course and fall over the near term as broader questions plague investors. Earnings likely come in as expected but guidance will be negative, leaving investors with rising volatility that must be digested before a substantial bull run back to the July highs can get going.
The bears likely gain control by the close or early next week as several indicators reveal pessimism on the macro environment. These include:
Russell 2000 Technicals: Small stocks are breaking down and reflect declining confidence in economic growth.
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.
Short-Term Treasury Rates: Short rates are rising, a portent of higher inflation and/or Fed rate hikes, potentially bearish for equities.
Long-Term Treasury Rates: Long rates are rising and that will reduce the attraction of equities while cooling the housing and auto industries to the detriment of economic growth.
BTP-Bund Spread Of Italian & German Bonds: Italian default risk and corresponding crisis for the Euro are heightened, which can destabilize Europe and is bad for global growth.
Geopolitical Issues: Developments around Israel and the broader Middle East are a clear negative for equities.
But a bull run will emerge soon as there are several technical reasons why interest rates will peak soon and flip the markets around, including:
Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.
Gold Prices: Rising gold prices reflect positive expectations about interest rates, which is on net good 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.