Market Forecast For The Week of October 25, 2021

FORECAST: The S&P 500 rises from its two-month long consolidation and makes marginally higher highs despite the rise in COVID cases around the world and the modest pace of global economic growth. Equity markets have confounded the bears as volume picked up slightly last week while the market was rising, and derivatives traders have eased off instead of increasing their hedges. This implies that some of the rally has been due to short-covering, and thus not due to high levels of confidence. The fact that the market hits its September high and didn’t roll over into a double top but rather built a short-term support level is a sign the bulls are in control even as they lack much conviction. Expect the market to rise slowly with some backing and filling as volumes remain relatively below average.

Across asset classes there is similarly no meaningful conviction: the $US is rising against the yen, consolidating against the € and falling against the Yuan, while EM currencies consolidate. Within commodities gold is rising softly, copper looks set to decline as it failed to breach its May top, while oil is raging higher. Interest rates are in an uptrend but look to have made a short-term top late last week. Since the economic news has been consistently mild, and we have danced the COVID surge several times before, the signal from global financial markets is the path of least resistance is higher, with only rising profit estimates to curry enthusiasm from investors. Since valuations are fair these rising estimates are just enough to power the market higher but not at a robust pace.

Financial risk remains a concern but dollar shortages have eased. While China’s property crisis hasn’t triggered any fallout among global banks yet, cross-border bank claims are high (the most recent BIS data shows an increase in Q1 2021 of $646 billion, partly due to seasonal factors but still high, although due to comparisons with Q2 2020 it registered as a slight decline of -0.6% year on year), indicating contagion risk is a concern. EM debt repayment remains murky for badly run nations (e.g., Turkey, Argentina) but moderate global growth is buoying export confidence in major EMs. Fortunately there has been no major chatter regarding concentration risk or counterparty risk at large financial institutions.

My current market positions include a large cash position, and the following holdings: Activision (ATVI), Amgen (AMGN), Apple (AAPL), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE) and a small net short position in S&P 500 (the levered inverse ETF SPXU).