Technology Is Powering Ukraine But That Won’t Stop Russian Brutality, A Bearish Scenario The Bulls Ignore: The Action For Friday, September 8, 2023

Arms escalation in Ukraine evokes cautious concern in the top left of the Times this morning but for the markets the exploitation of technology is a godsend that keeps equities rising no matter what interest rates do. This year’s market proves that when technologies like AI, biotech and space transportation fuel the imagination the bulls dominate. But the prolonged conflict in Ukraine that’s spurring growth in defense budgets can only crowd out social spending as interest payments rise, and that can only fuel political uncertainty. So for now the bulls rest easy on increased spending while the bears grind their teeth over a future that looks increasingly precarious. The S&P 500 likely falls over the near term as the bulls take profits, but I expect the market to reverse course and rise over the next few weeks as FOMO resurges and the bulls buy the dip.

For a few more minutes the bears have control as several indicators reveal pessimism on China and the global economy These include:

  • S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market lower.

  • Shanghai Composite Technicals: Chinese equities are trading poorly and that bodes ill for the global economy.

  • Inflation Expectations: Investors expect rising inflation over the coming years, implying higher interest rates to come, potentially bearish for equities.

  • 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.

  • Emerging Market FOREX / $US: Nations like India, South Korea, the Philippines and Mexico are getting weaker against the dollar, and that’s bad for global growth since many key imports are priced in $.

  • 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 muted volatility across equities and bonds and other factors showing up in the action yesterday and overnight point to a bullish turnaround in the markets by mid-month: These factors include:

  • Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.

  • 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.

  • 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.

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.

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