The surprisingly strong market session on Wednesday has set up a very interesting market test as investors confront what is likely to be a "hot" CPI number. Headline inflation is expected to come in at 7.2% and core inflation at 5.9%, but an upside surprise would not be a surprise.
The steady buying on Wednesday caught many folks by surprise and was likely driven in large part by poor positioning. Shorts have been reloading, and many bulls are still very underinvested after dealing with tough market conditions. It is the sort of environment that creates fear of missing out, and there appeared to be a good amount of that occurring.
There wasn't any blaring headline to drive the positive action, but there is a growing consensus that Covid restrictions are coming to an end. Even places that had been highly restrictive are backing off as popular opposition grows. A strong earnings report from Disney (DIS) after the close Wednesday appears to confirm that there is a return to "normal" in many places.
The big question Thursday morning is whether the euphoric action on Wednesday marked a real change in sentiment or was it just a blip created in part by algorithms and short-term emotions. The response to this morning's CPI number will be a good test.
The bearish thinking is that this report is going to be a not-so-subtle reminder of the fact that the market is dealing with the highest inflation in decades and that we now have a hawkish Fed. The bullish thinking is that we already know this, have discounted it to some degree, and a dip will be a buying opportunity.
After the action on Wednesday, there likely were some newly created dip buyers, and we will see what they do if they have an opportunity. It seems a little too simple that the market will reverse and go straight down on a hot number, and I'm not counting on that. Many traders are looking to buy some bad news given the recent market action.
Action in front of the report at 8.30 a.m. is placid, but the computer algorithms are going to be active as soon as the news flow hits.
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