Market Forecast For the Week of October 30, 2023: Mollified Bears Hedge Their Bets As The Strong Bulls Pile In

FORECAST: The S&P 500 falls further to 4050 by the middle of this week before the Autumnal correction abruptly transforms into the beginning of a classic Santa Claus rally. The final 1.5% downmove takes the index to support levels and marks a valuation point that’s attractive to all but the most committed bears, setting up a for a massive move of money market funds into equities of all classes.

Sentiment among bullish investors has turned to nervousness this Autumn as the index makes lower highs and lows while earnings estimates from bottoms-up analysts persistently trend negative. Of the leading 100 firms I follow twice as many have seen their estimates cut materially compared with those getting upgrades since earnings season began two weeks ago. Despite inflation running at 3-4% most firms aren’t able to leverage easy pricing to boost margins and are dealing instead with skittish affluent consumers and increasingly hard-up low end consumers. And many firms across various procyclical industries have reported declining quality of earnings, despite the clear acceleration in economic activity as measured by the Atlanta Fed. The combination of poor technicals, uninspiring fundamentals and a hawkish Fed means the weakest of bulls have been cutting exposure and this likely persists until a clear support level obtains.

But when the weak bulls have folded the committed bulls will then pile in along with those who’ve missed this year’s rally like myself. Despite persistent inflation which will drive an inflation mindset and dampen productivity, the fact remains that the US economy is accelerating for the moment and that makes 2024 earnings growth a meaningful possibility. A Santa Claus rally will emerge just as the full slate of earnings comes due; barring a new round of negative guidance expect the bulls to take over after Apple reports earnings late this week.

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.