Idalia’s Horror Doesn’t Harrow Investors But Presents An Inconvenient Fact That Will Test Late Summer Confidence: The Action For Thursday, August 31, 2023
Hurricanes hardly ever happen in the major financial centers but the inconvenience of correlating hurricane season with worsening climate patterns adds to global Wall Street’s concerns that confidence is simply too high for reality. Bullish factors still trump the bearish but superstitions around September likely come to fore with a growing list of negative developments to substantiate pessimism and profit-taking. The S&P 500 likely rises over the near term to 4565 but I expect the market to consolidate at that point rather than streak up to a new 52-week high. Climate problems and confidence in national leadership may well sour the mood into a selloff that keeps the August correction alive.
For today the bulls have control as several indicators reveal confidence in interest rates US economic growth. These include:
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.
Russell 2000 Technicals: Small stocks are breaking out and reflect surging confidence in economic growth.
EPS Estimates: In the last week Wall Street analysts raised profit forecasts for many firms in the S&P 500.
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.
Inflation Expectations: Investors expect lower inflation over the coming years, implying lower interest rates to come, potentially bullish for equities.
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.
But based on the action yesterday and overnight there are more risks the bulls need to climb over, 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.
Liquidity Metrics: Measures of money flow across the globe are trending downwards lately, which hurts equities.
My current positions reflect my near-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.