Investors showed no fear in front of Thursday morning's consumer price index report and on Wednesday ran the market nearly straight up.
The CPI report has replaced the jobs report as the most important economic news. According to Bloomberg, the market has moved an average of 3% on the last five CPI reports.
What is most notable about the setup of this report is that there is a widespread expectation that the report will be softer than expected. Stocks have been trading strongly into the news and gained additional traction on Wednesday.
We now have slightly extended technical conditions, which increased risk of a sell-the-news reaction, even if CPI comes in light. But the bulls are counting on underinvested longs and short-squeezes to keep things running, even if CPI is just in line. It will be a mighty battle between sell-the-news on the one hand and underinvested bulls and short covering on the other.
The risk of a selloff has increased because of this rally, but we will find out very quickly after the news whether there really is enough poor positioning to keep things running.
I will have much more on this in the morning, but keep in mind that the market is going to quickly shift to worries about labor-related inflation and the upcoming earnings season. Banks will start to issue their reports on Friday morning.
That inflation is starting to trend down is not a big surprise, but there is a substantial risk that it may not fall as quickly as hoped.
We have a very dangerous setup for CPI on Thursday, so be ready to react quickly as things develop.
Have a good evening. I'll see you tomorrow.