Market Forecast For the Week of April 4, 2022: Bullishness Is Close To Exhaustion, And Worse News Lies Ahead

FORECAST: The S&P 500 rises just beyond last week’s highs to 4660 before consolidating. Growth optimism combined w/relief that Biden is too cautious to push back against Putin are giving the bulls temerity to push equities higher despite the suffering and moral degradation apparent across the globe. With equity volumes so low on this recent upsurge I continue to see the bull trend reversing, but recognize the bulls have the advantage until the newsflow provides a visceral reason to get the bears shorting again.

Higher interest rates have yet to be visceral enough to stunt the bulls, despite the impact on valuation models. Earnings estimates are declining too mildly to do it either, contrary to my past predictions. The top 100 firms in the S&P 500 have seen their profit estimates for 2022 cut by 1 percentage point in the past week (from 10% to 9% growth), hardly enough to warrant a bear market. Nor has the inversion of the belly of the yield curve stemmed optimism, this despite the stabilization of inflation expectations which imply that equity investors are complacent and riding the flow of global funds into US markets.

I see the newsflow pointing to an escalation of the war and to a confrontation with China over supporting Russia as changing this risk-happy flow of funds and the attendant complacency. Other issues such as Imran Khan’s potential destabilization of nuclear-armed Pakistan or a shocking electoral decision in France could similarly reverse global confidence. The calculus of risk suggests numerous fat tails and leads me to see lower lows later this month, and consequently either a major buying opportunity or a global calamity ensuing.

Financial risk is a significant concern as dollar shortages may emerge due to sanctions on Russia’s Central Bank and several commercial banks. And 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. Talk of financial contagion is enough to thwart global investor confidence. And 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.

My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETF UPRO.