Good News On The American Political Front Helps The Cause of Decency and Democracy But Does Nothing Whatsoever For The Bulls: The Action For April 16, 2024
While the Times and others note that the GOP Speaker’s decision to free up aid to our allies comes on the heels of the first direct Iranian attack on Israel, it’s also no coincidence that it comes as Trump stands accused of filthy behavior politicians have long been prohibited from doing without disqualification. The GOP looks, sounds and smells poorly and that may yet save the world more trouble from tyrants bent on aligning with the American far right. Such good news can account for some of the relief keeping markets from sinking today. But while the S&P 500 likely consolidates over the near term, a further fall is likely as yesterday’s rout was as bad as I expected on a superficial level but much worse when judging market internals. The drumbeat of geopolitical horrors and persistent inflation has yet to wane and more bulls are likely to sell out in the near term.
The bears likely gain control tomorrow as several indicators reveal pessimism on 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 lower.
Russell 2000 Technicals: Small stocks are breaking down and reflect declining confidence in economic growth.
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.
MOVE Index Of Bond Volatility: Fixed income volatility is rising and implies higher inflation expectations and higher interest rates to come, potentially bearish for equities and the global economy.
High Yield Credit Spreads: The cost of borrowing is rising for lower-rated firms compared to their AAA siblings, a portent of potential defaults to come.
Developed Market FOREX / $US: The dollar is getting stronger against most major currencies (€, ¥ and Renmimbi) and that’s usually bad for global growth.
Emerging Market FOREX / $US: Nations like India, South Korea, the Philippines and Mexico are getting weaker against the dollar, and that’s bad for global growth since many key imports are priced in $.
Geopolitical Issues: Developments around Eurasia are a clear negative for equities.
Based on the action yesterday and overnight there are a few factors that likely flip the markets around next week, including:
Copper Prices: Copper makes the energy transition happen but is also a barometer of global growth, and rising prices signal growth may be better than expected.
Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps equities.
This morning I sold a part of my position in the levered ETF UPRO, consequently my current positions include 3M (MMM), Pfizer (PFE), a small position in UPRO and a larger position in SPXU, which nets out to a net short position in equities.