A Long Cold War Should Tamp Down Optimism But The Bulls Are Raging This Morning: The Action For Tuesday, November 14

While the Times assures us in this morning’s header that China’s leadership really is Communist the bulls on Wall Street are playing as it were 2015, before trade wars, pandemics and the clash of civilizations. And while the stage may be set for a true Santa Claus rally the bulls will eventually listen to news once again and take this market much lower than current levels to reflect declining economic growth the world over. For now however, the S&P 500 likely rises over the near term and possibly through December.

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

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

  • Inflation Expectations: Investors expect lower inflation over the coming years, implying lower interest rates to come, potentially bullish for equities.

  • BTP-Bund Spread Of Italian & German Bonds: Italian default risk and a corresponding crisis for the Euro are muted, which is critical for European stability and is good for global growth.

  • Zinc Prices: Few commodities are as broadly important as zinc, and rising prices for zinc signal better than expected global demand, which is usually good for equities.

  • Economic Data: The latest economic data regarding inflation is better than expected, a positive sign for equities

  • Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps equities.

Based on the action yesterday and overnight there are few risks manifesting except the big geopolitical ones, including:

  • Geopolitical Issues: Developments around Israel and Iran 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