Whether Democracy Or Autocracy The Results Remain The Same, Which Suits The Bulls Just Fine: The Action For January 18, 2024
Impotent government from East to West is the theme of the day in this morning’s Times and has curious resonance for Wall Street as the bulls try to gin up the markets. If the Fed can’t tamp down the economy and reach their inflation target and the Biden administration keeps jacking up the debt and in turn interest rates, does it matter? The Times notes that China can do nothing to affect its peoples’ sex lives and American regulators can do little to actually improve industry and products, but are either going to dent earnings growth for the rest of the decade? The bulls are betting not as exuberance over AI initiatives and weight-loss miracles give them reason to believe in double digit earnings growth and persistently high valuations. But while the S&P 500 is trying to rally this morning it likely falls over the final sessions of the week, as warning signs abound on both a slowing global economy and persistently higher interest rates.
The bears will likely gain control by the close as several indicators reveal pessimism on corporate earnings and the macro environment. These include:
S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market lower.
Volatility of Volatility & Put/Call SKEW Metrics: Derivatives trading in volatility is heightened and signals that active investors are concerned equities are going lower.
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.
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.
Zinc Prices: Few commodities are as broadly important as zinc, and falling prices for zinc signal that global demand is weak, which is usually bad for equities.
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.
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.
Economic Data: The latest economic data regarding the labor market is better than expected, a negative sign for equities since it implies interest rates will stay higher for longer.
Geopolitical Issues: Developments around the Middle East and Central Asia 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.
This morning I trimmed by bullish position so that I am effectively neutral on the market: my current positions include 3M (MMM), Pfizer (PFE), and a small position in UPRO and a larger position in SPXU, which nets out to a neutral position in equities.