A combination of improved conditions in China, a strong earnings report from Walmart (WMT) , and a cooler-than-expected PPI report has the market sharply higher Tuesday morning. The big gap was created by the PPI, which has helped to slightly improve the odds that Fed will raise interest rates by 0.50% rather than 0.75% at its next meeting in December. Odds are now 85% of a 0.50% hike, up from 80%.
This really is coming on top of a very sizable move that was triggered by the better-than-expected CPI report and is now starting to feel rather frothy. Easy entry points are long gone, and the only way to put any substantial cash to work is to chase some extended charts.
I'd put on a small index short for a trade, as I think the momentum is starting to peak. It is just a day trade at this point, but I believe the market is too optimistic about the economic situation.
The market is often very simplistic in embracing certainty narratives. The narrative that is driving the positive action right now is that inflation is slowing and trending down. We have had several reports of decline, and it is easy to extrapolate and expect that to continue. However, the Fed has made it very clear that they do not trust just a small sample of data. They need to see lower inflation develop over the course of several months before they will be confident that their policies are working. They have made the mistake before of prematurely backing off on their hawkishness and will try not to do it again.
Even if the narrative of steadily slowing inflation is correct, we still have the issue of economic growth. If Fed policy is having an impact, then it is inevitable that it is going to impact growth. The market doesn't seem to be concerned about that right now, but it is an issue that is really going to matter in the future.
The great likelihood is that the evolution of the economy is likely to be extremely bumpy and inconsistent. If you buy that theory, then the way to deal with this market is to fade strength and buy weakness, especially when there is economic news to serve as a catalyst. The theory behind that is easy, but the timing is very hard.
The tricky thing about this market is that much of the buying is being driven by poor positioning and short-squeezes rather than strong bullish conviction and that action can last longer than seems reasonable.
I did make one new buy this morning of Planet Labs (PL) on news of a joint venture with Microsoft (MSFT) and sold the last of my Biotech ETF, Direxion Daily S&P Biotech Bull 3X Shares (LABU) , but I'm mainly looking for an opportunity to press an index short.
