Market Forecast For the Week of March 27, 2023: Going Far And Getting Nowhere As The World Churns

FORECAST: The S&P 500 consolidates yet more this week before beginning another retest of the 4200  region as Spring arrives. Newsflow concerning the lack of bank runs and European bank failures lead investors to discount the worst-case scenario for bank earnings reports coming up in April. With that brick swallowed the bulls feel empowered to scale the perpetual wall of worry backed with the bond market’s prediction of Fed rate cuts later this year.

I see little chance of further bank runs since there are no visceral signs of distress that could induce the wealthy to take the trouble of banking afresh. While Janet Yellen exhibited a rare error of judgment in suggesting First Republic would be treated differently from Silicon Valley Bank, the market is coming around the view that in this pre-election year no bank runs will be tolerated. The action in European bank stocks is even less rational as the merger of USB and CS will likely nudge the big banks to consolidate rather than maintain the status quo. Far from flailing in distress the European economy looks slightly more positive after the Swiss manhandled Middle Eastern and other investors in CS coco bonds and shares. These mild positives are all the bulls need to retake control as they reflect that the bears made little headway despite a brewing banking crisis in their pocket.

While I expect the bulls to churn markets into April the fundamentals remain problematic for current valuations. The bears will eventually retake control when the S&P hits 4200 and many have capitulated by putting their cash in the market and covering their shorts. At that point peak optimism will give way to rationality as data revealing persistent labor market strength and services inflation will coincide with continued deterioration in earnings quality to show the bulls just how delusional the last 6 months have been.

My current positions include a large cash position, 3M (MMM), Pfizer (PFE), and the levered ETF UPRO and smaller position in the inverse levered ETF SPXU.