Zelensky Gives Humble Thanks For Sustained Support While America’s Bulls Debate The Sustainability Of Their Exuberance: The Action For Tuesday, September 19, 2023
The unseemly contrast between bullish investor exuberance and the strained and somber resilience of Ukrainian freedom fighters has started to wane as the bulls internally debate whether earnings will rise into 2024. American aid to Ukraine amounts to less than 1% of the government budget and barely 1% of taxes, yet today’s Times notes Ukrainians know their bitter reality and give thanks for whatever Biden chooses to give. But as Trumps pulls away in GOP polls that aid is in jeopardy, and fittingly the bulls are increasingly concerned the fiscal stimulus that’s driven the economy may also wane if Trump wins and rolls back Biden’s policies. Consequently the market has a sober feel this week and S&P 500 likely falls over the near term, which I expect to reverse later this week as the consolidation continues along with the earnings debate.
The bears have control for the moment as several indicators reveal pessimism on inflation and interest rates. These include:
S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market lower.
Russell 2000 Technicals: Small stocks are breaking down and reflect declining confidence in economic growth.
Shanghai Composite Technicals: Chinese equities are trading poorly and that bodes ill for the global economy.
WTI Crude Prices: Oil and by extension gasoline is getting more expensive and that in itself hurts consumers and the global economy.
But based on the action yesterday and overnight there are several factors that will soon flip the markets around, including:
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.
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.
Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps 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.