The April CPI report will hit the market Wednesday morning at 8.30 am ET. The consensus annual estimate is 8.1%, which would be a drop from 8.5% last month, which was the highest reading in 40 years.
The big question for market participants is whether this level of inflation is already discounted or not. Last week the market rallied energetically after Fed Chair Jerome Powell said that an interest rate hike of 0.75% was off the table, but it quickly changed its mind, and has collapsed over the last four trading days.
We have a similar dynamic at work Wednesday morning, with many bullish pundits anxious to embrace the idea that while inflation is still quite strong it has peaked and will begin to slowly decline. In other words, the market has already fully discounted this concern.
It is a good setup for a countertrend bounce, and many traders are looking for the combination of an oversold market with "less bad than expected" news to trigger a strong rally. There was some attempt at an oversold bounce on Tuesday, but the traders were unable to sustain it, and there was a weak finish.
There are a couple of underlying issues to note as we contemplate the market's ability to bounce. First is that some of the growth names are being aggressively repriced. There is carnage in very high P/E names such as Upstart Holdings (UPST) , Coinbase Global (COIN) , Unity Software (U) , Roblox (RBLX) , and others. Indeed, we see multiple contraction on a major scale, and it is going to take a while to sort it out.
The other major issue is the unevenness of this correction. As I keep noting, both the Dow Jones Industrials Average and S&P 500 still have not met the technical definition of a bear market, while almost 70% of all stocks in the market are down 20% or more. So while there is some absolutely brutal action in much of the market, many of the big-cap stocks and the indexes are at a much different point in their corrective process.
For many months now, we have been dealing with the issue of whether secondary stocks can find a bottom while the primary names are still struggling to find a low, and the process is still ongoing. That is what is making it so difficult to start looking to build longer-term positions.
The market is anticipating a positive reaction to CPI in the early going, but we are going to see major volatility on this news. An oversold bounce makes sense, but there are so many stuck longs that it is going to be hard for any real FOMO (fear of missing out) to develop.