The Action For December 5, 2023: Nasty Eurasian Currents Find Their Magnetic Pole In The Persistent Menace Of Trump
The darkness inherent in a Trump victory coincides with the darkness currently afflicting modern Russia and the hell in Gaza to give the Times a profoundly negative slant this morning that’s absurdly lightened by reportage over the resurrection of the kiwi bird. On the heels of a Chinese credit downgrade the bulls are having their own dark morning as the raft of horrific geopolitical problems find economic manifestation in China’s weak confidence and vulnerability to COVID. The S&P 500 likely falls over the near term, but I expect this to reverse course in anticipation of Friday’s employment report, whose results will determine whether the market shoots up next week in defiance of the political mood or moves into a correction.
The bears have control for the moment as several indicators reveal pessimism on corporate earnings and the macro environment. These include:
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.
High Yield Credit Spreads: The cost of borrowing is rising for lower-rated firms compared to their AAA siblings, a portent of potential defaults to come.
Zinc Prices: Few commodities are as broadly important as zinc, and falling prices for zinc signal that global demand is weak, which is usually bad for equities.
Aluminum Prices: Aluminium is a critical input for consumer and industrial goods and falling prices signal weak global demand, which is usually bad for equities.
Geopolitical Issues: Developments around the Middle East are a clear negative for equities.
But based on the action yesterday and overnight there are several factors that likely flip the markets around by Thursday, including:
Russell 2000 Technicals: Small stocks are breaking out and reflect surging confidence in economic growth.
Inflation Expectations: Investors expect lower inflation over the coming years, implying lower interest rates to come, potentially bullish for equities.
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.
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.