Market Forecast For the Week of January 8, 2024: Explosions Everywhere Keep The Bulls From Exploding Higher Until This Thursday’s Inflation Print

FORECAST: The S&P 500 rebounds modestly from last week’s downturn but the early rally peters out as the index hits 4730, failing to reach the old highs of 2022 and setting up for more consolidation as January unfolds. The key issues dogging the bulls are the persistence of high real yields in the US and war in the Middle East, both of which could damage the fragile sentiment underlying the global economy. While the world wants to return to normal the path forward for robust earnings growth gets harder as oil prices tick up and debt coverage ratios worsen, leaving the bulls scrambling to lock in profits and show something for their unseemly ebullience in 2023.

The bulls are hoping this week’s inflation readings end the bond market correction and put the focus back on earnings. The bears have feasted modestly since the New Year but earnings expectations continue to confound their pessimism. My tracking of the top 100 stocks shows that estimates are holding steady with a slight downward bias, not enough to destroy the bull’s confidence. Since first quarter earnings are 2 weeks away the tug of war rests on this Thursday’s CPI report which can either show disinflation intact or breaking down at the 3% level. The recent increase in bond market volatility indicates traders are bracing for a pessimistic reading and that would send equities lower until earnings come in to potentially save the day. But given the persistently negative quality of earnings over 2023 the odds are good that guidance comes in softer than hoped for, making the recent rally one of the most ferocious double tops in market history.

My current positions reflect my intermediate-term bullish forecast, and include 3M (MMM), Pfizer (PFE), and a large position in UPRO that is partially hedged by an offsetting position in SPXU, which nets out to a long position in equities.