A note was going around Monday that was put out by the sales and trading desk at JP Morgan. The note gave probabilities of what the desk envisioned the market moves could -- would -- be if the consumer price index came in better or worse than expected.
One of those options listed was that if it came in low enough, there was a 5% probability the S&P 500 could rally 10%. Needless to say I saw that and scoffed immediately. Why? Because I have a strong aversion to calls for crashes and melt-ups. They are rare events-outliers-- so if you call for one then you had better have more reasons than 'a better CPI' in my view.
What is more common is what we saw on Tuesday: A rally that stopped near resistance and gave back many of the gains, but not all of them. It is almost the inverse of the day we got the jobs report nearly two weeks ago. Folks were disappointed in the stronger-than-expected employment data and we opened the market lower, but it clawed its way back by the end of the day.
If that Friday in early December after the jobs report made you bullish, then you were sorely disappointed last week when the market fell a few percent. And, yes, that means that maybe Tuesday's give-back shouldn't make you terribly bearish, either.
Quite frankly, breadth improved, but not enough to change the indicators. The number of stocks making new highs did not surpass the prior readings we saw six weeks ago.
The transports made a lower-high. The Russell 2000 made a lower-high. The banks, after holding for four days, were red for most of the day. Even bonds didn't really react to the lower CPI the way they reacted a month ago.
I don't know what Fed Chair Jerome Powell will say on Wednesday. Nor do I know if he will say anything that will move the market. But I do know that if whatever he says or does takes the market lower, the optimism that crept into the market on Monday will be swept away quite quickly. And that would in turn send us back down to another short-term oversold condition. That's the nature of this current chop we're in.
So can we see the market retreat on Wednesday? I would like to think we can. The Daily Sentiment Index for the VIX is now at 14, which is the lowest it has been since late March. I would note that the VIX has been quite weird this week, having been up so much on Monday with the S&P up 1%. So if the market rallies instead and the Volatility Index comes down, it is going to scoot that DSI right into the danger zone.
So that seems to be the choice in the market. More rallying, and we set up a far too low DSI for the VIX or pull the market back and set up another short-term oversold rally. That would keep the sideways chop intact.