Stocks Rip Higher On Cooler Inflation As The Mechanical Bull Rides Again

11/12/2022

2 minutes read

2022.11.12 00:35

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So came in cooler than expected at 7.7% versus 7.9%. Certainly not what I expected, and that is how it sometimes goes. Unfortunately, I am a person like everyone else. I have been wrong plenty of times in the past. I have plenty of readers that remind me of that every day. The Cleveland Fed’s data has been consistent and far better than any source I have followed for some time, and to have bet against them would have been a mistake, in my opinion. All one can do is assess the market and use the information. Unfortunately, it is not the first time I have been wrong, and it will not be the last.

But, it is essential to remember this isn’t likely to change the path of monetary policy anytime soon. It was enough to spark a massive short-covering event, and it probably removes a 75 bps rate hike off the table for December, which was questionable at best to begin with. But remember, the more rates fall, the more the dollar weakens, the more stocks rise, the more financial conditions ease, the more the Fed needs to tighten, and the more Powell will fight back against the market. Remember Jackson Hole.

The managed to climb 5.5% yesterday, which is odd and almost the equivalent to what the S&P 500 rallied off that CPI print in October from the low.

SPX Term Structure

It would imply, I think, that much of the rally, again, was what we have learned to see throughout this bear market. Events lead to elevated implied volatility, and once the event ends, the IV drops dramatically, and stocks squeeze higher. This tells us that these rallies, which feel good, are not stable.

S&P 500 Index, 15-Min Chart

Also, yesterday, we saw a tremendous amount of call volume, with most of it for yesterday’s expiration date. This tells you that you saw an IV-led rally and a gamma squeeze on top of it. Call buyers push the markets higher by creating positive deltas for market makers to hedge against, causing them to buy S&P 500 futures.

SPX Historical Volume

Rates

The bond market is closed today, so it will be interesting to see how the stock market trades without bonds. The rate fell yesterday to around 4.30% and stopped at support.

US Bonds 2-Yr Yield 1-Hr Chart

The also closed right at support yesterday as well.

US 10-Yr Bond Yield Daily Chart

Dollar

I’m concerned about the because it fell through a significant uptrend, and a weakening dollar does not help the Fed’s cause. The next level I am watching to see if it holds comes at 107.25. If that breaks, then the dollar probably has much further to fall.

Dollar Index Daily Chart

Copper

Why is the falling dollar terrible news? Because it means higher commodity prices, and was not an exception yesterday, rising by more than 2%. What does copper at $4.6 mean for inflation?

Copper Daily Chart

Nasdaq

There is not much to say here, the s are now back to resistance around $285, and unless the options market starts playing, the QQQs could be stuck at $285 because that is roughly the area where the prominent call positions are.

NASDAQ Daily Chart