Ambiguity Across The Real World And Unmistakable Optimism On Wall Street: The Action For December 14, 2023

The cold complications of the Israel-Palestine war and the UAE’s absurd negotiations over government ecological mandates bother the Times this morning but there’s no mistaking the simple euphoria brimming in the markets after Jerome Powell’s performance yesterday. The message deduced from this unseemly symmetry is clear: whatever happens in the Middle East for now stays in the Middle East. The consequences of the bubble up will be felt in early 2024, but for now it’s risk-on as the S&P 500 likely rises over the near term and makes a bid for the 2022 all-time high.

The bulls have control for the moment as numerous indicators reveal confidence in 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 higher.

  • Russell 2000 Technicals: Small stocks are breaking out and reflect surging confidence in economic growth.

  • 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.

  • 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.

  • High Yield Credit Spreads: The cost of borrowing is falling for lower-rated firms compared to their AAA siblings, a confident signal of an improving economy.

  • 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.

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

  • 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.

And based on the action yesterday and overnight there are few risks standing in the bulls’ way, 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.

  • Shanghai Composite Technicals: Chinese equities are trading poorly and that bodes ill for the global economy.

  • Geopolitical Issues: Developments around the Middle East and Ukraine 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 partially hedged by an offsetting position in SPXU, which nets out to a long position in equities.

Warmth Is Wealth