Self-Centeredness Divides The Right Wing Collective And Keeps Many Bulls On The Sidelines: The Action For January 26, 2024

Beyond the sad and strange stories on the left side of the Times the main story of Trump-mania hits a surreal crescendo with revelations that several Trumpists in the Senate are disgusted with the GOP candidate’s latest example of selfishness. The divisions sown in the GOP make it probable that Trump-lite policies continue in a second Biden administration, keeping fiscal stimulus in play and girding the bulls. But the macroeconomic devolution such policies entail will soon hit the bulls too, setting up for a major correction of this year’s melt-up. Some bulls are already contemplating that likelihood and holding the S&P in its current narrow range around its all-time highs this morning.

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

  • High Yield Credit Spreads: The cost of borrowing is falling for lower-rated firms compared to their AAA siblings, a confident signal of an improving 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.

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

  • 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.

  • Short-Term Treasury Rates: Short rates are falling, a sign of moderate inflation and a dovish Fed, potentially bullish 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.

  • Tin Prices: Tin is broadly used across goods and industry and rising prices typically signal better growth prospects.

  • Economic Data: The latest economic data regarding inflation levels and GDP growth is better than expected, a positive sign for equities

But I expect consolidation ahead of the close as the bulls take profits ahead of next week’s earnings, and consider the financial and political risks, including:

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

  • 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.

  • WTI Crude Prices: Oil and by extension gasoline is getting more expensive and that in itself hurts consumers and the global economy.

  • Geopolitical Issues: Developments around the Middle East and Ukraine 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.

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