D&D Note (5.27.2022) ~ Stocks Continue to Rise with Inflation Showing Deceleration ~
The markets biggest worry right now is inflation, so when we got a positive read in todays report stocks took off to rally. But is this just an oversold bounce with month end rebalancing?
The Core Personal Consumption Expenditures Price Index rose 4.9% year over year in line with estimates and shows a deceleration from March. This core inflation reading is the preferred measurement of the FED and strips out food and energy prices which are extremely volatile.
When you include food and energy we saw an increase of 6.3% from a year ago, decelerating from 6.6% last month.
Headline PCE climbed only 0.2% compared to 0.9% in March. Overall data shows that the American consumer continues to spend but is now tapping savings to do so.
The FED has blatantly signaled they will be rising interest rates 50 basis points in both of the next FOMC meetings. However the minutes from the last meeting showed they are willing to pause after the next two meetings if financial conditions stabilize.
The FED has a dual mandate from Congress to “promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates” in other words their policy needs to both promote maximum employment while keeping inflation stable.
The FEDs inflation goal is 2% and after years of never being able to get up to 2% this year we have skyrocketed past that goal with the Consumer Price Index (CPI) hitting 9.2% in March.
Stock Specific Notes:
Tesla continued its 3 day rally up 7+% today.
Coinbase also continues its 3 day rally up 7+% today, this despite crypto languishing at the bottom of the their trading range.
Today D&D started a position in Cyber Security company Palo Alto Networks. We see Cyber Security as a sub sector of Tech that will have strong performance this year. We also have a position already in Checkpoint. Today Palo Alto Networks finished up 0.93% and Checkpoint up 1.56%.
“Whale” call & put option contracts today (aka large traders betting millions in option contracts) in Taiwan Semiconductor shows the next 30 days the stock is likely to trade in a range between $90 to $120. Bullish trades come in at 41% while Bearish trades come in at 58%. The stock closed today at $93.76.
Market Knowledge Tip:
We are in a trading range where as we fall lower the support lines become resistance lines in a rally.
In a Bear Market (as we are in now) when we get to the top of trading ranges you need to look to sell (selectively) and when we get to the bottom of trading ranges you need to look to buy (selectively).
(Below) YTD S&P 500 trading range (circles highlight where we sold and raised 54% cash around 4600 and then when we did our first large buying with 1/3 cash raised around 3850):
(Below) 1 Year S&P 500 trading range:
(Below) 3 Year S&P 500 trading range:
(Below) For greater context here is a 20 year chart of the S&P 500 showing how we had an outsized standard deviation movement higher in the last year:
Closing Markets (as of 1:15pm PST)
DOW up 1.76%
S&P 500 up 2.47% (4,158.24)
NASDAQ up 3.33%
VIX down -6.25% to 25.78
10 Year Note UNCH to 2.743%
Oil up 0.938% to $115.16 a barrel.
Gold up 0.168% to $1850.70 an ounce.
Bitcoin down -1.39% to $28,932.68
Ethereum down -4.07% to $1,767.41
~ Dave James / Principal Trader and Market Strategist