Five days ago, there was an overwhelming consensus that the indexes were grossly oversold. Still, I don't know many traders who were calling for a 6% to 7% rally in the S&P 500, Nasdaq and Russell 2000. But that's what we've seen since bottoming out on Tuesday, Sept. 6. The question everyone is battling with now is how stocks react to the August Consumer Price Index (CPI) report here on Wednesday morning regardless of where it comes in.
I don't know what the latest inflation numbers will be. I suppose the decline in gasoline prices should have us looking for a dip in inflation, but as Helene Meisler noted in her Monday column, we're reminded daily about how high rents are, and that's a massive component of the CPI. As a landlord, I can't believe how high rents have shot up over the past 12 to 24 months, and I have no idea how most folks continue to pay them.
While I'm glad my job isn't to predict how these economic reports will come in, I think we all know that it isn't the report that matters but rather how the market responds to the information. After the rally over the past four days, a back-test of the 21-day exponential moving average (EMA) would be an excellent, relatively mild correction for all three index ETFs.
I suspect most traders anticipate a better-than-expected read on inflation followed by a bullish pre-market gap and an immediate decline on the open. In this scenario, short-term traders will want to see buyers re-enter the market around that 21-day EMA. If this happens, the bulls remain in control.
The more difficult scenario, regardless of the CPI print, will be if stocks shoot higher at the open. On the Invesco QQQ Trust (QQQ) , I still have the $317-$318 zone circled as a likely area of supply, and while the market has traded well over the past few days, I expect to be a seller (though not a short seller) at the first sign of weakness.
One new stock that's caught my eye is Devon Energy Corp. (DVN) . If you're a fan of oil and gas or you're simply looking to trade something other than the indexes or technology stocks, take a look at DVN. As long as the stock holds above its 21-day EMA, it looks to have room to run toward the early June highs near $79.50.