Dread And Grief In Israel Keep A Lid On Irrational Exuberance on Global Wall Street: The Action For October 10, 2023

Yesterday’s unseemly rally in equities in the face of the horrors in Israel and Gaza likely fizzles out today as the long-term consequences of this shock engulf the Middle East. That Iran and Qatar will escape punishment without causing ructions in fossil fuels seems unlikely, and given the unsettled path of inflation in the US any new source of energy volatility can only weigh down the bulls But the situation may play out over months as Israel comes under more fire for destroying Gaza, offering the bulls a respite from worries over geopolitics. The S&P 500 likely consolidates over the near term, as numerous bearish factors cap the bulls until earnings season gets fully underway, after which the bulls likely take back control on the back of better-than-feared results.

The bulls have control just for the moment as several indicators reveal confidence in bouncing from oversold conditions, and the macro financial environment. These include:

  • Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.

  • Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps equities.

But based on the action yesterday and overnight there are more risks that will cap the bulls, including:

  • EPS Estimates: In the last week Wall Street analysts lowered profits forecasts for many firms in the S&P 500.

  • Shanghai Composite Technicals: Chinese equities are trading poorly and that bodes ill for the global economy.

  • Geopolitical Issues: Developments in Israel, Gaza and Lebanon are a clear negative for equities.

  • BTP-Bund Spread Of Italian & German Bonds: Italian default risk and corresponding crisis for the Euro are heightened, which can destabilize Europe and is bad for global growth.

My current positions reflect my intermediate-term bullish forecast, and include 3M (MMM), Pfizer (PFE), and a large position in UPRO that is largely hedged by an offsetting position in SPXU, which nets out to a long position in equities.

Warmth Is Wealth