Market Forecast For the Week of March 11, 2024: Too Much Money Is Chasing Too Few Stocks, But The Bulls Have A Temporary Answer For That

FORECAST: The S&P 500 consolidates early in the week as investors await and then digest Tuesday’s CPI report, before rocketing higher to 5200 by week’s end. The goldilocks scenario is playing out beautifully for the bulls and only a malignant CPI report can shock the bears out of their shells.

Disinflation now and through the summer is now the mainstream thesis and leading to a consensus on Fed rate cuts by the summer. That is reason enough for the bulls to rotate their positions out of most megacap stocks toward lower quality techs and old economy stocks. The past two weeks have shown that a major rotation can coexist with a rising S&P, as fears of recession fade into obscurity. The only factors that could potentially counter the goldilocks scenario are a turnaround in liquidity and a blowup on the geopolitical stage, and only the former is guaranteed to happen.

But when liquidity does decline the market will correct hard as leverage that’s propelled gold and bitcoin and other speculative assets will go into reverse and take down all risk assets with them. Liquidity will dry up since the Fed has let bank excess reserves accumulate over the past 6 months despite their avowed stance on QT. Since the Fed has suggested on numerous occasions that bank reserves should be about 30% lower than current levels, the only way liquidity can remain at current levels is if the Fed has secretly changed its mind. Assuming they have not, then a trillion dollar drop in liquidity will have a multiplier effect on equities, sending the S&P 500 to a retest of last October’s lows, if not a retest of the bear market lows of 2 years ago. The bulls have control but only for a brief shining moment.

On Friday I sold a portion of my position in the levered ETF UPRO, consequently my current positions include 3M (MMM), Pfizer (PFE), a moderate position in UPRO and a slightly larger position in SPXU, which nets out to a neutral position in equities.