Confidence In Most Everything Is Declining And That Makes Buying Equities A Jolly Distraction: The Action For January 30, 2024
The farrago of stories in this morning’s Times coalesces in the slim article given to the UN’s scandal in Gaza, an example of failures in both democracy and sensibility, with no positive consequences for any side of the conflict. The same holds true for the markets, where many bulls now fear the melt-up while bears feel helpless in taking a contrarian bet since melt-ups aren’t governed by laws or have expiry dates. What is clear is both global markets and the real economy are careening toward unsustainable debt, conflict and inequality, with nasty political consequences the only guaranteed result. For now the S&P 500 likely rises over the near term toward 4950, but the eventual correction of overconfidence will take it far below these levels.
The bulls have control for the moment as several indicators reveal confidence in corporate earnings and the macro environment. These include:
Russell 2000 Technicals: Small stocks are breaking out and reflect surging confidence in economic growth.
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.
Long-Term Treasury Rates: Long rates are falling and that will improve the attractiveness of equities while boosting the housing and auto industries to the benefit of economic growth.
Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps equities.
Based on the action yesterday and overnight there are few risks the bulls need to climb over, including:
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.
Geopolitical Issues: Developments around West 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.