D&D Note (8.10.2022) ~ Cooler-than-Expected CPI Report Lifts Stocks with S&P 500 Closing Above 4200 ~
Stocks gapped up and rallied to start the session after a cooler-than-expected CPI print on inflation came in at 8.5%.
Throughout the morning the S&P 500 flirted with trading above 4200, by the afternoon it slipped to below 4200 then rallied into the close to end up at 4210.
Technical Support and Resistance are both like a mattress that “gives” so often there is an over or under shoot of the technicals, it doesn’t always stop “at the penny”. Which is why the market has to “hold support” and retest support to confirm.
There have only been 16 times since 1952 that we’ve seen a big sudden drop like we had in June this year. The only times the market didn’t retest or at least pullback was when the FED was cutting rates.
Investors must keep in mind the Fed Funds rate traditionally doesn’t stop going up until it is equal to the CPI level. Right now there is a giant gap between the Fed Funds rate and CPI.
Next months CPI could end up a flat reading with non energy falling but energy rising back up.
Reason we could see energy and Oil go up in coming months is the Strategic Reserves program will be ending and demand from China will be coming back as they come out of Covid lockdowns.
Keep in mind about half of food prices is just the diesel cost to ship the food. So if oil goes up that will cause food prices to stay elevated.
August is traditionally not a great month for stocks with low volume due to traders being on vacation. September is historically the worst month.
However in election years there is historically a post election rally.
What that all means is the FED is not going to pivot until at least September after raising an additional 75 basis points. The pivot will also be less dramatic than many traders are hoping for. A pause in hikes is less likely and rather a reduction in size of hikes is likely with perhaps another 50 basis points. Then next year pausing but not likely cutting rates while the FED lets Quantitative Tightening do the work needed to crush demand.
Now is still a good time to review your portfolio and weed whack any stock you own that doesn’t create profits (think the ARKK basket of stocks).
Build up some dry powder and be prepared for the market to trade back down to the low end of the trading range.
Closing Markets (as of 1:15pm PST)
DOW up 1.63%
S&P 500 up 2.13% (4,210.24)
NASDAQ up 2.89%
VIX down -9.51% to 19.70
2 Year Note down -4.52bp to 3.22%
10 Year Note up 1.10bp to 2.79%
Oil up 1.04% to $91.44 a barrel.
Gold down -0.34% to $1,806.10 an ounce.
Bitcoin up 2.65% to $23,670.02
Ethereum up 8.00% to $1,822.79
~ Dave James / Principal Trader and Market Strategist