Market Forecast For the Week of February 21, 2023: Delusional Markets Turn Bitcoin Into A Legitimate Indicator
FORECAST: The S&P 500 consolidates early then rallies to 4200 only to sink once again to 4050 as the bulls fail to attract new buyers at inflated valuation levels. As the bulls make a final stand liquidity begins to dry up and the index breaks support by early March and begins a downhill race to touch the lows of October. “Don’t fight the Fed” rejoins its wayward companion “Don’t fight the tape” as delusion turns to fear and trading opportunities swing from the bullish side to the bearish.
The bulls can’t break 4200 due to their preposterous arguments regarding companies’ ability to generate double-digit earnings growth from current levels. Not only is corporate guidance pronouncing hard times ahead but earnings quality deteriorated in the fourth quarter. Both are historically strong predictors of future earnings; thus the bulls are effectively predicting that 2024 will be an historic year for growth. Declining Fed liquidity, a yawning budget deficit and endless war in Europe all militate against economic growth yet the bulls swear by the delusional notion that the 2020s will be just like the 2010s.
The differences in America and across the globe between the pre-COVID and post eras are legion, but key among them is the Fed has abandoned its old policies and feels vindicated by the latest economic data. Higher rates for longer means lower asset prices from current levels. Another consequence of the bulls’ delusion is the emergence of bitcoin as a measure of global liquidity. An asset with no intrinsic value and profoundly wasteful of environmental resources has now become a useful indicator of confidence and liquidity policy. Global liquidity has inched higher since October but the Fed is determined to remove that impetus, and that spells the end of both delusional asset classes. As liquidity drains from the global economy the question with shift from forecasting earnings growth to calling the ultimate end of the bear market.
My current positions include a significant cash position, 3M (MMM), Pfizer (PFE) and the inverse levered ETF SPXU, which nets out to a significant short position.