Market Forecast For the Week of May 6, 2024: When Inflation Sticks Resistance Is Painful For The Bulls

FORECAST: The S&P 500 rallies to resistance at 5171 before consolidating ahead of inflation reports due in at mid-month. Should next week’s CPI reveal that disinflation has suddenly returned then I expect a retest of the old highs around 5265 by end of month. But the more likely event is continued deterioration in the growth-inflation dynamic and a new push higher in yields, bringing the index back to the April lows around 4900.

The bulls are hoping for a change in direction on several fronts, none of which are likely. First, disinflation has stalled and the bulls expect it to restart, despite the elevated trend in wages and the recent rallies in commodity prices. Second the jobs picture should moderate just a little but not too much, despite clear weakening in manufacturing and drops in small business and consumer confidence. And lastly the dollar should decline and spur global growth, despite the recent intervention in Japan and the artificially constricted trading in everything from the Chinese Yuan to the Turkish Lira to the Pakistani Rupee. When only government action can keep the dollar from surging the risk is clearly against currencies and by extension, the global economy.

Key to dollar dynamics and the fate of the US markets is the price of oil, which has recently fallen and given the bulls reason to hope disinflation returns. But most likely the fall in oil reflects deteriorating demand, which would help FOREX markets but hurt profits and by extension equities. The bulls are on borrowed time in this age of excess leverage and a comeuppance is near.

My current positions include 3M (MMM and its spinoff SOLV), Pfizer (PFE), and a moderate position in SPXU, which nets out to a moderate short position in equities.