Market Forecast For the Week of November 15, 2021: Irrational Exuberance Is This Year’s Disposable Holiday Gift

FORECAST: The S&P 500 makes new highs this week as hot money pours into the American equities despite geopolitical qualms and a drop in consumer sentiment. Seasonal factors (i.e., the Santa Claus rally associated with the end of tax harvesting) are overwhelming rationality and I expect irrational exuberance to carry this week as we make marginal new highs and set up for a correction into year end.

Last week I noted the keys to the market were copper and the $US, with copper determining short-term momentum and the $US the intermediate term. Copper is rounding out a bottom and poised to break out, which signals that this week should be positive for equities. But the $US strength against the € and Yuan and other EM currencies suggests that hot money is pouring into the US and that typically means a reversal is imminent. Expect the market to cool down by Thanksgiving and a major correction to be a buying opportunity for 2022.

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 to the non-financial private sector (e.g., real estate) are high according to the most recent BIS data. So the global financial markets need the Chinese Communist Party to finesse the troubles at Evergrande et al, which the CCP is incentivized to do since Chinese retail investors have money at stake. But overall the most recent BIS data shows a decrease in Q2 2021 of $308 billion (although due to comparisons with Q2 2020 it registered as a slight increase of 2% year on year), indicating contagion risk is now only a modest 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 long position in S&P 500 (the levered inverse ETF SPXU and levered ETF UPRO).