Vengeance On Full Display Is Finally Knocking The Air Out Of The Bulls: The Action For January 17, 2024
As Middle East horrors move eastward to the South Asian subcontinent the Times notes that malevolence and fear are rising across America too, in the form of the man from 5th avenue. Their resignation toward such a noxious political atmosphere mirrors the temporary giveback of the bulls as the market heads lower this morning. Too much growth and too much inflation are killing dreams of a near-term Fed rate cut, but I expect the bulls to recover their poise by later in the week and try for another run at all-time highs. The bulls haven’t let the Fed scare them or cared about geopolitics for so long now that they are primed to see the bright spot in strong nominal GDP sooner rather than later.
For today, however, the bears have control as numerous indicators reveal pessimism on corporate earnings and the macro environment. These include:
Shanghai Composite Technicals: Chinese equities are trading poorly and that bodes ill for the global economy.
S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market lower.
Russell 2000 Technicals: Small stocks are breaking down and reflect declining confidence in economic growth.
EPS Estimates: In the last week Wall Street analysts lowered profits forecasts for many firms in the S&P 500.
Quality Of Earnings Trend: Over the past few quarters the largest firms have generally experienced worsening credit terms, margins and inventories, signaling future profit stagnation or decline.
Inflation Expectations: Investors expect rising inflation over the coming years, implying higher interest rates to come, 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 $.
Aluminum Prices: Aluminium is a critical input for consumer and industrial goods and falling prices signal weak global demand, which is usually bad for equities.
Geopolitical Issues: Developments around the Middle East are a clear negative for equities.
Based on the action yesterday and overnight the only immediate bullish factor is liquidity metrics, as measures of money flow across the globe are trending upwards lately, which will eventually help equities.
My current positions reflect my near-term bullish forecast, and include 3M (MMM), Pfizer (PFE), and a moderate position in UPRO that is partially hedged by an offsetting position in SPXU, which nets out to a long position in equities.