A License For Good Times Ensures Fast Driving Now But Also Nasty Traffic Stops Down The Road: The Action For November 8, 2023
Subtle celebration marks the tone of the Time’s lead article on abortion rights this morning, but after noting the clear desire of most Americans to preserve their liberty the article fails to explain how such an open-and-shut issue can remain subject to revisionism by the courts. Lost in the abortion debate is any sophisticated moral defense for the freedom of choice, simply because abortion is one of those issues where liberty can’t be easily separated from license. And galling license is precisely what the bulls have arrogated on Wall Street, taking the markets higher despite clear precepts that advise caution rather than euphoria. But the license to run a Santa Claus rally will soon be revoked, as the S&P 500 first rises over the near term but then falls hard as we approach December. New highs are not in the cards but rather a retest of the October lows, as the bears exploit the limited rationale for the rally and pound the table on valuations, high interest rates and prospects for geopolitical disaster.
The bulls have control for the moment as several indicators reveal confidence in corporate earnings and the macro environment. These include:
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.
Aluminum Prices: Aluminium is a critical input for consumer and industrial goods and rising prices signal better than expected global demand, which is usually good for equities.
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.
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.
WTI Crude Prices: Oil and by extension gasoline is getting cheaper and that in itself helps consumers and the global economy.
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 some risks the bulls need to climb over that will eventually invigorate the bears, including:
Volatility of Volatility & Put/Call SKEW Metrics: Derivatives trading in volatility is heightened and signals that active investors are concerned equities are going lower.
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.