Indifference Sours The Mood In Washington But Lightens The Mood Of The Bulls As We Approach The Weekend: The Action For Friday, September 29, 2023
Washington’s indifference toward its racial legacy and the upcoming effects of the government shutdown dominate the top half of the Times this morning, but as we head into a quarter-ending weekend it’s the return of indifference to interest rates that sets up global investors for a rosy open. Still too many sociopolitical and geopolitical issues dominate for the bulls to feel lasting confidence about the course of rates. I see this rally as a preview to a bullish resurgence later in October, with a likely retest of the mid-4200 level still in the cards before the market heads meaningfully higher.
The bulls have control just for the moment as several indicators reveal confidence in corporate earnings and the macro environment. These include:
Russell 2000 Technicals: Small stocks are breaking out and reflect surging confidence in economic growth.
Aluminum Prices: Aluminium is a critical input for consumer and industrial goods and rising prices signal better than expected global demand, which is usually good for equities.
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.
Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.
But based on the action yesterday and overnight there are more negative factors and risks the bulls need to climb over, including:
Inflation Expectations: Investors expect rising inflation over the coming years, implying higher interest rates to come, potentially bearish for equities.
WTI Crude Prices: Oil and by extension gasoline is getting more expensive and that in itself hurts consumers and the global economy.
S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market lower, possibly by the close.
Shanghai Composite Technicals: Chinese equities are trading poorly and that bodes ill for the global economy.
Gold Prices: Falling gold prices reflect higher potential interest rates and a stronger dollar more so than any decline in geopolitical risks, which is on net bad 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 largely hedged by an offsetting position in SPXU, which nets out to a long position in equities.