The much anticipated CPI report indicating higher inflation than the already elevated expectations, so investors are now bracing for even higher interest rates. The Dow lost 200-points on the day and the S&P 500 and Nasdaq saw modest losses but things were much worse just after the release of the report. Bonds reversed up after an initial decline. The dollar was down, and oil was fairly flat but traded in a wide range.
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The year over year 9.1% increase in consumer prices is a hot number and will certainly get the Fed's attention, and the Fed Fund's rate futures were trading higher. There is now a 74% probability that the Fed will raise one full percentage point (1.0%) at the July meeting, instead of the 0.75% that was previously expected. Before the CPI came out they were pricing in only about a 5% chance of a full percentage point hike. They are also pricing in another 0.75% hike in September which would put the Fed Funds rate well over 3%. 0% interest rates were so ridiculous for all of those years, but this quick jump to 3% is a shock to the system.
Just before the release of the CPI report on Wednesday, the S&P 500 futures were up about 45-points. Fast forward 20 minutes later and they were down 70+ points at the lows yesterday. They closed down about 17-points. The S&P 500 Index traded within that range during the course of the day which created an outside day that closed relatively flat compared to the volatile intraday swings, which is possibly a reversal type of formation as the indecision was apparent. There was either a lot of buying in that 3760 area, or a lack of sellers, but once the futures recovered those early losses, the buyers dried up as well.
The S&P 500 fell below its bear flag yesterday, but it closed closer to the highs of the day than the lows creating a spinning top formation, which as I said, is a sign of indecision from traders and investors. The 0.45% loss was a lot less dramatic than we saw after the prior CPI report in June, which wasn't as hot as this recent one. So the question is, if the data is getting worse but the market is acting better - at least as of yesterday's close, has the worst case scenario already been priced in?
We haven't gotten into earnings season yet and I think this could be an eye opener since estimates haven't been lowered all that much despite increasing prices, labor costs, and the cost of borrowing money.
Yields were up initially after the CPI report but they backed off when the concern shifted from inflation to the impact on the economy from higher interest rates.
The dollar also reversed lower after another new high early on, but it bounced back after filling in Monday's open gap (blue.)
This is a tough market for the bulls and the bears right now. The bulls are fighting the trend and hoping much of the trouble that we are seeing is already priced in. Meanwhile the bears have been on the right side of the action, but they know how explosive rallies can be if the Fed gives any hint of pivoting, or suggests inflation is peaking, and being short during a moment like that can be crushing to a bear. I'm staying nimble but I won't suggest timing this is going to be any easier.
The S&P 500 (C-fund) fell below its bear flag and even though it closed well off its lows, it also closed back below the 20-day moving average after about a week above it. As I mentioned above, yesterday seems like a day that the bears should have gotten more aggressive but instead the bulls put up a good fight and the bears seemed to back off after the initial selling. The chart suggests more downside but the fact that the trading was much different than we saw after a similarly poor CPI report in June, may indicate that that the downside is getting a little exhausted. We'll have to see how how the action follows through today and into earnings season.
The DWCPF (S-fund) chart looks similar - a close below the 20-day EMA and well off the lows, but this one did not close below its bear flag, after an early break below it.
EFA (I-fund) has been bouncing above and below its bear flag for a week, and yesterday it flirted with the June lows. The weakness in the dollar yesterday may have saved it from making new lows.
BND (Bonds / F-fund) traded in another wide range as it opened sharply lower, fell below the trading channel and retested that open gap area before rebounding sharply higher. It did close just below the 50-day EMA.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
To get weekly or daily notifications when we post new commentary, sign up HERE.
Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
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The year over year 9.1% increase in consumer prices is a hot number and will certainly get the Fed's attention, and the Fed Fund's rate futures were trading higher. There is now a 74% probability that the Fed will raise one full percentage point (1.0%) at the July meeting, instead of the 0.75% that was previously expected. Before the CPI came out they were pricing in only about a 5% chance of a full percentage point hike. They are also pricing in another 0.75% hike in September which would put the Fed Funds rate well over 3%. 0% interest rates were so ridiculous for all of those years, but this quick jump to 3% is a shock to the system.
Just before the release of the CPI report on Wednesday, the S&P 500 futures were up about 45-points. Fast forward 20 minutes later and they were down 70+ points at the lows yesterday. They closed down about 17-points. The S&P 500 Index traded within that range during the course of the day which created an outside day that closed relatively flat compared to the volatile intraday swings, which is possibly a reversal type of formation as the indecision was apparent. There was either a lot of buying in that 3760 area, or a lack of sellers, but once the futures recovered those early losses, the buyers dried up as well.
The S&P 500 fell below its bear flag yesterday, but it closed closer to the highs of the day than the lows creating a spinning top formation, which as I said, is a sign of indecision from traders and investors. The 0.45% loss was a lot less dramatic than we saw after the prior CPI report in June, which wasn't as hot as this recent one. So the question is, if the data is getting worse but the market is acting better - at least as of yesterday's close, has the worst case scenario already been priced in?
We haven't gotten into earnings season yet and I think this could be an eye opener since estimates haven't been lowered all that much despite increasing prices, labor costs, and the cost of borrowing money.
Yields were up initially after the CPI report but they backed off when the concern shifted from inflation to the impact on the economy from higher interest rates.
The dollar also reversed lower after another new high early on, but it bounced back after filling in Monday's open gap (blue.)
This is a tough market for the bulls and the bears right now. The bulls are fighting the trend and hoping much of the trouble that we are seeing is already priced in. Meanwhile the bears have been on the right side of the action, but they know how explosive rallies can be if the Fed gives any hint of pivoting, or suggests inflation is peaking, and being short during a moment like that can be crushing to a bear. I'm staying nimble but I won't suggest timing this is going to be any easier.
The S&P 500 (C-fund) fell below its bear flag and even though it closed well off its lows, it also closed back below the 20-day moving average after about a week above it. As I mentioned above, yesterday seems like a day that the bears should have gotten more aggressive but instead the bulls put up a good fight and the bears seemed to back off after the initial selling. The chart suggests more downside but the fact that the trading was much different than we saw after a similarly poor CPI report in June, may indicate that that the downside is getting a little exhausted. We'll have to see how how the action follows through today and into earnings season.
The DWCPF (S-fund) chart looks similar - a close below the 20-day EMA and well off the lows, but this one did not close below its bear flag, after an early break below it.
EFA (I-fund) has been bouncing above and below its bear flag for a week, and yesterday it flirted with the June lows. The weakness in the dollar yesterday may have saved it from making new lows.
BND (Bonds / F-fund) traded in another wide range as it opened sharply lower, fell below the trading channel and retested that open gap area before rebounding sharply higher. It did close just below the 50-day EMA.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
To get weekly or daily notifications when we post new commentary, sign up HERE.
Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
