Market Forecast For the Week of August 21, 2023: The Correction Continues Until It Suddenly Doesn’t

FORECAST: The S&P 500 corrects further toward 4304 before rebounding strongly out of oversold conditions. Should the VIX measure of implied volatility fall as the market moves higher the chances of making new yearly highs grows and with that the potential for a blow-off top that finally ends the shocking bull market of 2023 that should never have been.

Supporting this market has been a modest turn in earnings estimates since the second quarter ended. While earnings declined for many firms the results were better than feared and firms earnestly improved the quality of those earnings. But the poor quality of earnings running up to the 2nd quarter suggests more pressure to come, and I don’t expect the optimism to last. When estimates stop rising so too bullish exuberance will fade, and recognition of the high opportunity cost of owning stocks will settle in. Expect a major leg lower later in the year as interest rates remain elevated and firms lower guidance for 2024.

Over the break I exited my heavy short position in the S&P 500 and initiated a large long position in the leveraged ETF UPRO followed by a smaller hedge via the inverse leveraged ETF SPXU. Consequently my current positions 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 an long position in equities.