GOP Dichotomies Nearly Keep Up With Those In Financial Markets: The Action For February 14, 2024

The market’s rally despite a huge swoon in bond prices testifies to the bewildering schism between bears and bulls and mirrors the absurdities occupying the GOP. While the staff at the Times get another crack at detailing the cracks in the GOP investors are similarly making the best of a bad situation by riding equities despite a raft of fundamental reasons to avoid them. Such is the unreality of this most bizarre of winters. The S&P 500 likely rises over the near term to new highs, but the accumulation of bearish factors will soon pull the rug out once Nvidia reports earnings next week.

The bulls have control for the moment as several indicators reveal confidence in 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 higher.

  • Russell 2000 Technicals: Small stocks are breaking out and reflect surging confidence in economic growth.

  • 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.

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

  • 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 some risks the bulls need to climb over, including:

  • Volatility of Volatility & Put/Call SKEW Metrics: Derivatives trading in volatility is heightened and signals that active investors are concerned equities are going 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.

  • 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.

  • Developed Market FOREX / $US: The dollar is getting stronger against most major currencies (€, ¥ and Renmimbi) and that’s usually bad for global growth.

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

  • 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.

  • Geopolitical Issues: Developments around Eurasia are a clear negative for equities.

This morning I added a significant short-term long position in equities, and am now long the market, as my current positions include 3M (MMM), Pfizer (PFE), and a large position in UPRO and a smaller position in SPXU, which nets out to a long position in equities.

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