Thursday was the strongest day for stocks in two years. The S&P 500 jumped 5.54% and the Nasdaq Composite soared 7.35%.
Stocks ripped when the October Consumer Price Index (CPI) figures came in lighter than expected. Inflation at the consumer level declined to a 7.7% annual rate, which was below nearly every estimate on the street.
In retrospect, consumer inflation appears to have peaked in July at 9.1%. On the chart below, the blue lines signify the actual monthly figures, while gold markings represent the estimates.
Source: Fair Market
CPI inflation has dropped from 9.1% to 7.7%. This means the Fed must now slow its pace of interest rate hikes, as we indicated it would last month.
According to the CME's 30-Day Fed Funds Futures, December's Federal Open Market Committee (FOMC) meeting is likely to yield a 50-basis-point hike. Those contracts now indicate that a terminal rate near 4.9% will be reached by May.
Source: CME
In other words, we can expect a total of 100 basis points from here, starting with 50 in December.
As Philly Fed President Patrick Harker noted on Thursday, monetary policy has a lag time, which he placed at about one year. This means that the full effect of this year's FOMC rate hikes are yet to be felt.
Harker also said he'd consider a pause when the fed funds rate hits 4.5%. That's only 50-75 basis points away. Harker isn't a voting member of the FOMC this year but will be in 2023.
Thursday's action was undeniably bullish, but I'm still hesitant to go all-in on stocks. The jarring price action had all the characteristics of a short-covering rally. Stocks closed near their highs, an indication that we may see some follow-through, but I'm skeptical as to how long it will last.
The S&P 500 still hasn't scaled two of the three hurdles I described in this article, although it took a big step in that direction on Thursday. Next up is the 61.8% Fibonacci retracement at 4,003 (point B), followed by the index's 200-day moving average (red, point C), currently located at 4,082.
Source: TradeStation
If the S&P 500 can scale all three hurdles, that will be my signal to lean into this rally.
I did manage to pick up some Tesla (TSLA) for a trade at $182, a support level that was previously mentioned here. On Wednesday, the stock dropped to $177, an 18-month low, thus giving us the entry at $182.
Source: TradeStation
However, I am concerned about CEO Elon Musk's preoccupation with Twitter and how that may impact his other ventures. Because of this, I'm prepared to bail out of Tesla if the stock drops below Wednesday's low of $177.
