Waterlogged Politics And Water-Scare Gaza Reveal A World Of Cross-Currents That’s Sinking Wall Street: The Action For October 25, 2023
Water issues explicitly and implicitly dominate the Times this morning as a legislative war over water bottling in Maine competes the horrors in Gaza and the underlying issue of water scarcity that pervades the Middle East. The link to climate change is obvious but the myriad issues dominating both Washington and the global capitals relegates that issue to the back burner. But Wall Street is dealing with the issue more concretely, as persistent inflation from Biden’s feckless environmental and other bills keeps interest rates and the outlook murky. The S&P 500 likely falls over the near term, despite strong earnings from MSFT, as all eyes are on the bond market and the need for funding by Biden’s Treasury.
The bears have control for the moment as several indicators reveal pessimism on 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 lower.
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.
Economic Data: The latest economic data regarding retail sales is stronger than expected, a negative sign for interest rates and for equities.
Geopolitical Issues: Developments around Israel and the broader Middle East are a clear negative for equities.
Based on the action yesterday and overnight there are several factors that will eventually 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.
Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps 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.