I want the market to be truly bullish as much as anyone, so this brings me no joy to say – but there’s even more evidence mounting for a bearish outlook in the immediate future.
I know the markets have been rallying this year, and that’s all fine and well. While people are riding that high, I’m removing all emotion and looking at the market for what it is, technically and fundamentally.
The good times are about to end, and with this recent bit of news, it might be sooner than a lot of people – myself included – expected.
You might think I’m talking about January’s recently-released CPI report. I’m not.
I’m talking about something that casts doubt on not just that, but everything we’ve seen from the market for months.
We saw the rally and the enthusiasm from investors and all I could do was scratch my head.
That rally did not jive with everything I was seeing technically. But it isn’t difficult to diagnose the cause.
I’ve talked a good bit about the role that “fear of missing out” (a.k.a. FOMO) and the “hope trade” (The bear market is over because I hope it is) are having on this market.
Well, we’ve proven that those traders are able to effect some short-term change, as the market was booming on the back of bullish hopes, reports of softened inflation, and the Fed hinting toward a more dovish approach.
So, as a result, we saw other traders jump aboard – those FOMO traders – and the market was driven even higher. Suddenly, we were off to a rip-roaring start to the 2023 trading year.
But that brings me to what I said about the reports of softened inflation and the Fed
That is the crux of the news that has me shaking my head at the emotion-driven activity taking place throughout the markets.
And the latest CPI report only intensifies my feelings on the topic…
We’ve been sitting pretty on the notion that disinflation was underway. That is, the rate of inflation was lessening on a month-to-month basis.
CPI readings for the past few months have painted a similar picture, and that’s partially what’s guided the actions of the Fed and the belief of traders that perhaps we’re nailing that soft landing after all.
Let’s set aside this morning’s CPI report for a second and pull the scope back.
What few people seem to be talking about is we just received word that each of the three months’ CPI reports for October, November, and December have been revised – and that the term “disinflation” was nothing but misleading.
Overall CPI, core CPI, and services CPI were all revised up by at least a tenth of a percentage point from their old readings in those months.
As we know, there is not a single thing that moves the markets more than CPI reports and the Fed, and a lot of times, CPI is the horse that leads the Fed’s carriage.
Basically, these revisions are directly intertwined with the reality that the market is set for a steep correction in the near future.
A lot of that aforementioned hope was staked on the possibility of a soft landing and inflation lessening without doom and gloom.
Well, this morning’s latest CPI announcement throws even more cold water on that notion. Sure, January 2023 was one-tenth of a percentage point lower than December 2022 in terms of year-over-year monthly inflation.
But when you dig deeper into the granular levels of this report, it doesn’t look all that rosy.
Food, hotels, car insurance, repairs and rental, and, most importantly, services, are all seeing prices increase. (It’s widely understood that before the Fed gets interest rates back down to the targeted 2% level, services are going to need to reverse course.)
Simply put, I see absolutely nothing from this month’s CPI that shows me the Fed is going to be loosening the reins anytime soon.
The only takeaway I can really feel confident in is that this market is not turning bullish anytime particularly soon.
And that’s before we even take into account how the Fed even views the CPI reports! Who’s to say they’re not already baking in further revisions into their calculations for next month’s meeting.
After all, how can they reasonably trust these numbers if the past three months have all been revised to show even less deflation than reported? It’s a downright losing proposition, and it further complicates the decision-making for Jerome Powell and his cohorts.
With the market rallying on the back of three consecutive months of “disinflation,” that positive sentiment has been largely sapped.
Now, not everyone has completely caught up to this reality quite yet, and there are still some hopeful traders out there staying the course and buying.
As of now, we are seeing a pretty conflicted market, as the S&P 500 is more or less staying flat. Meanwhile, the percentage of companies on the S&P trading above their 50-day moving average (MA50) isn’t budging, which tells me we should be maintaining our posture of keeping the powder dry and refraining from trading just yet.
For what it’s worth, here is a table showing the tickers on the S&P currently trading above their MA50…
When this market turns to the downside, these will be the ones that lead the charge.
Again, it brings me absolutely no joy to tell you the market turbulence is far from over. All I can do is read the market objectively and formulate a plan of attack from there.
While the emotional traders drive themselves crazy, our bird’s eye view is going to lead us to safety and profits.
All we need is a little patience and discipline. We’ll make the most of whatever comes.
