Market Forecast For the Week of January 30, 2023: Caution Precedes A Blow-Off Rally As The Bulls Make One Final Stand
FORECAST: The S&P 500 consolidates early in the week between 4000-4100 on fears of hawkish comments by the Fed on Wednesday afternoon. But from that transient moment of common sense the bulls wrest control yet again and send the index rocketing higher on exuberant optimism feeding on bearish exhaustion. I now expect this bear market rally to extent to 4200 before a resurgence of volatility and strong data on persistent consumer spending help the the bears reassert control and take the market back to the lows of October.
Bears like myself have been covering their losing short positions and helping drive the market higher, while bulls have not only touted the look-through to the mid-2020s but also trade up the most speculative parts of the market like crypto and meme stocks. Simultaneously the large middle section of cautious & relatively underinvested institutions and retail investors have largely kept new money on the side of fixed income or cash. I expect much of that cautious money to flow into equities later in the week assuming Jerome Powell gives even the tiniest hint of give on financial conditions or the terminal Fed Funds rate. As the S&P breaks 4100 resistance a blowoff rally fed by new money takes the index to 4200, and that point even the bulls begin to wonder how much more money will come in vs. how much profit-taking feels prudent. By mid-February expect the mirror image of January to manifest as the bulls exhaust themselves and the bears are permanently reanimated.
The key fundamental issue is whether investors can legitimately look through to 2024 and beyond on earnings. The accumulated negative corporate guidance and persistently inverted yield curve mean it’s only a matter of time before the average investor regards forward-looking valuations as preposterously out of synch with the normalization of interest rate policy. While valuations are almost never the cause of major downturns, in this case the low volume of trading in this bear market rally implies that most investors don’t really believe the hype and thus it’s only a matter of price before profit—taking sets in and reinvigorates the bears to wrest control of the narrative.
On Friday I initiated a short-term swing trade in the inverse levered ETF SPXU as I believe the markets will consolidate last week’s gains in the early part of this week. I also exited my position in Starbucks (SBUX). Consequently my current positions include a still very large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), and the inverse levered ETF SPXU, which nets out to a neutral position.