Market Forecast For the Week of May 30, 2023: The Bulls Soar On A Wing And A Prayer

FORECAST: The S&P 500 rallies to 4300 and takes small and mid-caps along with it in one final push to turn exuberant imagination into economic reality. After billowing up and down for 4 months the index is set to break out in a false move that lures the bulls’ prudent reserves of sideline cash into one last FOMO trade to resistance. Once at 4300 the bears reassert control and find little resistance among the bulls, as the tables turn with the bulls now having no new tale to tell and the bears feasting on an inexorable flow of bad news.

The bears have suffered since March from lack of narrative to move equities in their direction. The inability of a mini-banking crisis to move the S&P below support levels gave the bulls confidence that any good news would move the calculus to the positive side and substantiate their cause. But now that earnings season is nearly over while inflation has remained higher for longer and both inventories and debt have built up there is simply no newsflow to animate the bulls. Even the vaunted relief over 2nd quarter earnings failed to move analysts to lift earnings estimates. Where Wall Street expected 1% growth this year among the largest stocks before 2nd quarter reports came out, now the consensus is for slightly negative growth. The bulls effectively fear missing out on next year’s growth while throwing this year into the trash dump, a habit born during the pandemic.

The bears by contrast can rely on worsening earnings quality, worsening household balance sheets, worsening global liquidity and worsening political dynamics to provide a barrage of bad news through the summer into the dreaded Autumn. Case in point is the grand name of the American economy, Berkshire Hathaway, whose top-performing roster of operating companies is now expected to hit an unexpected rough spot due to both economic and financial trends. As the bulls brace for the negative liquidity event that the successful resolution of the debt ceiling will exert and simultaneously bear more liquidity draining in the form of ongoing QT the craving to take profits will overpower FOMO and lead to the beginning of the end of this the mother of all bear market rallies.

My current positions include a large cash position, 3M (MMM), Pfizer (PFE), a moderate position in the levered ETF UPRO and a slightly smaller position in the inverse levered ETF SPXU, all of which net out to a small long position in equities.