Market Forecast For The Week of November 8, 2021: The Parabola Has Ended And A Few Weeks of Consolidation Lay Ahead

FORECAST: The S&P 500 rises marginally and bounces off its upper trendline set over the spring and summer and consolidates for the remainder of the week. The drop in interest rates due to bad positioning by hedge funds is helping drive bullish enthusiasm this morning but that will tamp down as worries regarding COVID and weak holiday sales lead to profit taking.

The $US strength against the € and ¥ and some EM currencies is largely due to outperformance on the COVID and economic fronts, and has accompanied the equity market’s parabolic rise since October. This is not a good development however since it portends weak economic growth worldwide and hurts multinational earnings when translated into $US. Commodities are also implying negative developments, and key will be whether Copper rallies strongly this week after making a rounding bottom last week. Since oil is pointing to stagflationary conditions and gold pointing to inflation, the copper market will be the true tell on whether the global economy is slowing ever worse than current data show. For equities, the logical inference from all of this is the market’s parabolic rise eventually peters out into a correction that will spell a buying opportunity in choice equities that have strong long-term growth at reasonable valuations. I expect that correction to happen by late November, while the market rises marginally and consolidates gains until then.

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), FedEx (FDX), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE) and a small net short position in S&P 500 (the levered inverse ETF SPXU).