The Bulls Blissfully Forget That No One Likes To Be Contradicted, Least Of All The Federal Reserve: The Action For November 29, 2023

Contradictions mar a plethora of disparate issues in this morning’s Times, from health insurance to the Truce in Gaza, pristinely analogous to the equity markets as we close out 2023. While investors ignore fraught geopolitical issues and focus instead on strong GDP growth and falling interest rates the fundamental contradiction of defining an early cycle bull market when unemployment is low can’t be ignored for long. The Fed won’t do so, insisting rates will stay higher for longer while investors comically argue for cutting rate in the face of 5% growth and 3-4% inflation. The S&P 500 likely rises over the near term, but I expect it to fall back to consolidate more as the week progresses, as the current rally represents nothing more than irrational exuberance anchored to holiday cheer.

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

  • MOVE Index Of Bond Volatility: Fixed income volatility is steady and implies modest inflation expectations and stable interest rates to come, potentially bullish for equities and the global economy.

  • Developed Market FOREX / $US: The dollar is getting weaker against most major currencies (€, ¥ and Renmimbi) and that’s good for global growth.

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

  • Short-Term Treasury Rates: Short rates are falling, a sign of moderate inflation and a dovish Fed, potentially bullish for equities.

  • Long-Term Treasury Rates: Long rates are falling and that will improve the attractiveness of equities while boosting the housing and auto industries to the benefit of economic growth.

  • 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.

  • Emerging Market FOREX / $US: Nations like India, South Korea, the Philippines and Mexico are getting stronger against the dollar, and that’s good for global growth since many key imports are priced in $.

  • Copper Prices: Copper makes the energy transition happen but is also a barometer of global growth, and rising prices signal growth may be better than expected.

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

But based on the action yesterday and overnight there are several risks the bulls need to climb over, which likely pull the market lower, including:

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

  • Volatility of Volatility & Put/Call SKEW Metrics: Derivatives trading in volatility is heightened and signals that active investors are concerned equities are going lower.

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

  • Geopolitical Issues: Developments around the Middle East 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