Moroccan Heroism Momentarily Lays Bare The Unedifying Bullishness Of Global Wall Street: The Action For Thursday, September 21, 2023
The Times details with subtle reverence the efforts of ordinary Moroccans to deliver what has yet to come from their government in the face of incomprehensible tragedy, and contrasts remarkably with the desultory stories of American and UN politics across the rest of the front page. Were Global Wall Street listening the valuations of equities would collapse as investors reckoned with the prospects for continued inflation, war and terror, and the dispiriting drop in the workforce across the developed world. The bond market is partially listening and leading to a rush to to the safe asset of American cash accounts, and that’s dragging equities lower this morning. But I expect the market to rally back shortly as the consolidation continues through September.
The bears have control for the moment as several indicators reveal pessimism on interest rates, corporate earnings and the macro environment. These include:
Russell 2000 Technicals: Small stocks are breaking down and reflect declining confidence in economic growth.
Shanghai Composite Technicals: Chinese equities are trading poorly and that bodes ill for the global economy.
Short-Term Treasury Rates: Short rates are rising, a portent of higher inflation and/or Fed rate hikes, potentially bearish for equities.
Long-Term Treasury Rates: Long rates are rising and that will reduce the attraction of equities while cooling the housing and auto industries to the detriment of economic growth.
Developed Market FOREX / $US: The dollar is getting stronger against most major currencies (€, ¥ and Renmimbi) and that’s usually bad for global growth.
WTI Crude Prices: Oil and by extension gasoline is getting more expensive and that in itself hurts consumers and the global economy.
Copper Prices: Copper makes the energy transition happen but is also a barometer of global growth, and falling prices signal growth may be worse than expected.
But the bulls will likely buy the dip as the action yesterday and overnight show several factors in the bulls’ favor, including:
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.
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.
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.
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.
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.