The War In Gaza Stretches Toward New Fronts While The Bulls Fire Away At An All-Time High: The Action For January 19, 2024

The Times tries to lighten the load this snowy Friday with a gallimaufry of stories covering everything from escalating violence across Western Asia to a sober orbituary for the only truly funny man left in Western Art Music, Peter Schickele. The bulls are choosing the light and fluffy side as well and taking the market to new highs on the open, despite economic news that’s as dispiriting as the geopolitical. I expect the S&P 500 to close poorly and set up for a reversal as the bulls get ahead of themselves on earnings that come out later in the month.

The bulls have control for the moment though few indicators reveal confidence in corporate earnings and the macro environment. These include:

  • Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps equities.

  • 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.

Based on the action yesterday and overnight there are numerous risks the bulls need to climb over, including:

  • 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.

  • 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.

  • 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.

  • Geopolitical Issues: Developments around the Middle East and Central Asia are a clear negative for equities.

I am effectively neutral on the market, as 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.

Warmth Is Wealth