Stocks struggled in gloomy action on Monday as a host of big picture negatives concerned investors. The primary issue continues to be inflation and a hawkish Fed. Bonds fell sharply as interest rates rose, and when interest rates rise, it is the high PE growth stocks that tend to struggle the most. Those stocks are valued in large part on discounted earnings in future years, and higher interest rates mean a greater discount on the stream of future earnings.
Energy and commodity names were weak also, but it was not due to optimism about the situation between Ukraine and Russia. The issue is that there there is growing concern about falling demand from China as its economy struggles in part due to the fact that nearly 200 million people are locked down due to COVID concerns.
Two weeks ago, the indexes hit highs, and many pundits thought it very unlikely that they would retest the March lows. The logic was the bounce that began around March 15 was so big and so powerful that it wasn't just a run-of-the-mill bear market bounce. A move that strong would create some underlying support and bring in dip buyers on weakness.
Stocks have been struggling for two weeks now, and the S&P 500 is back under its 50-day simple moving average, and the Nasdaq and Nasdaq 100 are now back to the levels they were at two days after that big bounce started.
Sentiment has become quite gloomy, and that may be enough to produce an oversold bounce, but we have the CPI report coming up this morning, and that is going to cause a market move. It is expected that the data will show an 8.4% increase over the past year.
There are some economic forecasters that believe that this could be a top in the inflation readings, but nearly everyone agrees that the reading will stay strong for quite a while.
CPI will set the tone this morning. A hot number has already been anticipated, but market players are wallowing in doom and gloom, and any relief bounce is likely to attract some folks looking to reduce long positions.
We have slight positive action to start the day, but that will change when CPI hits at 8:30 am ET.