Political Ambiguity From Business Leaders Leads The Markets But The Bulls Dont Know It: The Action For November 9, 2023
Impotence among business leaders to address the complexity of the situation in Gaza catches the lead spot in this morning’s Times, but this longstanding facet of the public discourse has no impact whatsoever on the valuation of businesses and the trends in the market. Such is the disconnect between the issues of the day and the markets. The long-term fate of this disconnect is to bring valuations down as investors recognize that political impotence has consequences for productivity and policy efficacy, but that comeuppance will come in 2024. Over the next few weeks the markets are primed to see saw as the current rally in the S&P 500 fizzles out this week and likely reverses next week ahead of key inflation data.
The bulls have control for the moment as several indicators reveal confidence in corporate earnings and the macro environment. These include:
S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market higher.
Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.
MOVE Index Of Bond Volatility: Fixed income volatility is steady and implies modest inflation expectations and stable interest rates to come, potentially bullish for equities and the global economy.
Short-Term Treasury Rates: Short rates are falling, a sign of moderate inflation and a dovish Fed, potentially bullish for equities.
Long-Term Treasury Rates: Long rates are falling and that will improve the attractiveness of equities while boosting the housing and auto industries to the benefit of economic growth.
High Yield Credit Spreads: The cost of borrowing is falling for lower-rated firms compared to their AAA siblings, a confident signal of an improving economy.
WTI Crude Prices: Oil and by extension gasoline is getting cheaper and that in itself helps consumers and the global economy.
Zinc Prices: Few commodities are as broadly important as zinc, and rising prices for zinc signal better than expected global demand, which is usually good for equities.
Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps equities.
Based on the action yesterday and overnight there are some risks the bulls need to climb over, including:
Russell 2000 Technicals: Small stocks are breaking down and reflect declining confidence in economic growth.
Volatility of Volatility & Put/Call SKEW Metrics: Derivatives trading in volatility is heightened and signals that active investors are concerned equities are going lower.
Geopolitical Issues: Developments around the broader Middle East are a clear negative for 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.