Profound Horror Courts Airy Optimism And Spawns More Volatility: The Action For October 24, 2023
The farrago of headlines in this morning’s Times points to the unseemly marriage of horrible events across the globe with trivialities across America, all pointing to declining confidence. Despite the Times’ sympathy for regulating capitalism it paints the California Governor as an ecological bull apt to destroy the delicate balance of human needs and democratic clarity as he jet sets around the world. Even more jejune is popular obsession with a soccer star and the Times’ tracking of its economic consequences. In the face of bad news across all macro fronts the bulls are playing the same game, championing hope against reality. Though the futures are up this morning the S&P 500 likely falls over the near term, only to rebound in earnest as earnings come in from the megacaps.
The bears likely wrest control at some point today as several indicators reveal pessimism on corporate earnings and the macro environment. These include:
Russell 2000 Technicals: Small stocks are breaking down and reflect declining confidence in economic growth.
S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market lower.
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.
High Yield Credit Spreads: The cost of borrowing is rising for lower-rated firms compared to their AAA siblings, a portent of potential defaults to come.
Geopolitical Issues: Developments around Israel and the broader Middle East are a clear negative for equities.
But the market is getting oversold and based on the action yesterday and overnight there are two significant factors that will flip the markets around towards the end of the week:
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.
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.