So far, this week has been quite positive for stock pickers, speculative traders, and meme stocks. The Russell 2000 ETF (IWM) has been outperforming, and there has been some energetic trading due to the Russell rebalancing and some rebound in SPAC names.
This positive action faded into the close on Wednesday primarily due to concerns about the CPI report that will be issued at 8.30 am ET. It is likely that the report will confirm that inflation is rising at its fastest pace since around 2008. Price increases and supply shortages have been obvious to most consumers and an additional issue is that there are a record 9.3 million job openings, and employers are having a hard time hiring despite relatively high unemployment.
While a "hot" CPI report appears likely, the bond market does not seem to be too concerned. The 20+ Year Treasury Bond ETF (TLT) is holding around levels that it hit back in February. It is bonds that are going to determine if inflation really is the issue that equity investors are concerned about.
The inflation debate is centered on one word: "transitory." Jerome Powell and the Fed have been focused on the narrative that the surge in prices is temporary due to the acceleration in economic growth caused by the reopening of the economy. The theory is that once growth returns to a normal pace, then the inflationary pressure will subside. There could be some overshoot in the short term, but the Fed is sending the message that this action will be transitory.
Once the market digests the news, technical conditions look fairly good. The S&P 500 has been consolidating near all-time highs for a while and is not technically extended. Speculative action has been stronger while the big-cap names have been sluggish. The meme trading is causing some emotionality that impacts the broader market, but the price action in many stocks is positive.
We will see how the market reacts to the CPI number and go from there. I suspect we could see some dip buyers jump in fairly fast if there is a negative reaction, but there is a lot of skepticism about this word "transitory," and if the market is looking for an excuse for a deeper correction, then inflation will be a very convenient justification.
We have a very quiet start Thursday morning. Bitcoin continues to bounce, and that is helping to provide some speculative support.