Expanding War And Expanding Markets Make For A Strange Friday Morning Marriage: The Action For January 12, 2024
The Times duly notes the expanding war in the Middle East and the uncertainty of future Iranian actions like seizing oil tankers. But that hasn’t stopped the bulls from taking the market to new 52-week highs this morning, as mindless momentum draws in cash from the sidelines. But the risks to global confidence are evident in commodity markets, and I expect the bulls to lose steam as we learn more about the strikes in Yemen and simultaneously inch closer to a key weekend election in Taiwan.
The bulls have control for the moment but I expect the market to sell off shortly and consolidate as we approach the meat of earnings season. Several factors based on the action yesterday and overnight point to global bearishness this Friday, including:
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.
Quality Of Earnings Trend: Over the past few quarters the largest firms have generally experienced worsening credit terms, margins and inventories, signaling future profit stagnation or decline.
WTI Crude Prices: Oil and by extension gasoline is getting more expensive and that in itself hurts consumers and the global economy.
Aluminum Prices: Aluminium is a critical input for consumer and industrial goods and falling prices signal weak global demand, which is usually bad for equities.
Tin Prices: Tin is broadly used across goods and industry and falling prices typically signal worsening growth prospects.
Geopolitical Issues: Developments around the Middle East, Ukraine and Taiwan are a clear negative for equities.
The bull run likely continues next week after the election in Taiwan, as several bullish factors have lined up to support a move to higher highs, including:
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.
BTP-Bund Spread Of Italian & German Bonds: Italian default risk and a corresponding crisis for the Euro are muted, which is critical for European stability and is good for global growth.
Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps equities.
My current positions reflect my near-term bullish forecast, and include 3M (MMM), Pfizer (PFE), and a moderate position in UPRO that is partially hedged by an offsetting position in SPXU, which nets out to a long position in equities.