Market Forecast For the Week of November 21, 2022: The Bulls Give Thanks For Short-Term Memories And Hope For A Warm December

FORECAST: The S&P 500 rallies to 4120 by Thanksgiving but then stalls as it meets a key trendline dating from January. As December approaches the bond market falters and the $US recovers and bear market rally gives way to another leg lower that eventually lands the S&P back at the lows of October around 3500.

The deepening inversion of the US Treasury yield curve is the clearest sign that recession is approaching, which only an unusually warm winter can mitigate. Consequently the $US is falling along with long-term treasury interest rates, perversely resulting in rising equity valuations. But as earnings estimates decline valuations will get even more inflated and the likely resolution to this irony is the bull market ends in a collapse. Key to watch will be the industrial stocks that have led the rally since October, in particular Caterpillar and Colgate Palmolive. Both are trading at valuations reflecting pre-pandemic macroeconomics (i.e., free money and increasing globalization), and both are likely to take hits on international sales and profits due to the global slowdown. Should these stocks rise on declining volume as I expect, the market will top out and signal a return to old lows in quick order.

My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the ETF SPXU, all of which nets out to a large short position in equities.