The "sell the news" reaction to inflation was delayed for a day, but occurred on Thursday after a better-than-expected producer price index report. Overly anticipatory bears were hurt badly on Wednesday, when the consumer price index report was better than expected. Poor positioning, a high level of skepticism, and a short squeeze caused a frenzy of buying, but the producer price index report was unable to keep the move going.
Investors were aware that many stocks and the indexes have become overbought, and there are plenty of bearish macro-economic arguments, but the very strong price action created fear of missing out and some panic buying.
The indexes ended up closing at the lows of the day for the first since July 26, but the question we will confront in the next few days is whether this very powerful rally has created a supply of underinvested bulls that are anxious to buy pullbacks and dips. Buying dips always sounds like a great idea when stocks are running hot, but it feels much different when selling pressure starts to develop.
The recent rally has had an irrational feel to it. Even the bond market -- as seen in the bond fund (TLT) -- reflected concerns that inflation is still a substantial problem that has not yet been defeated. Yields jumped sharply today, and that finally seemed to impact equities later in the day.
It has been a very nice run off the June lows, but now we have to wait to see if there is some healthy consolidation that provides a foundation for another leg higher or if sellers will regain control and cause concern that this was just a very energetic bear market rally. The bears have negative seasonality to help them, but the market has caught many folks out of position, and that is likely to continue to be the case.
The battle will intensify on Friday. Have a good evening. I'll see you tomorrow.