The June Consumer Price Index (CPI) came and went. And, with it, more confusion arrived as well.
Investors learned this morning that inflation ran far hotter-than-expected last month (+9.1% YoY vs. +8.8% YoY expected) as even the core reading, which excludes energy and food prices, beat estimates (+0.7% MoM vs. +0.6% MoM expected).
The Fed has historically focused more on the core number than the headline when it comes to altering monetary policy. This gave Wall Street analysts the opportunity to terrify their already scared clients further in morning remarks.
“The core is chugging along at a frightening clip,” said Wells Fargo’s Michael Schumacher.
“With core running this strong, the Fed can’t ignore that. This is a bad number.”
Sounds pretty bearish, doesn’t it?
The Dow, S&P, and Nasdaq Composite futures all sunk immediately following the report’s release. The market (unsurprisingly) opened significantly lower.
A few hours later, however, traders realized that a bad CPI reading could indicate that the Fed would cut rates sooner than expected. Short-term Treasury yields soared in anticipation of stronger rate increases opposite longer-term Treasury yields, which fell.
The working narrative today was that, yes, a recession is here. But it won’t last long due to soaring prices, which should fiercely crush demand.
The S&P even flipped into positive territory through noon before ultimately closing moderately lower.
Now, the broader market index (as represented by the SPY) is caught in “no man’s land.” Will it go up from here? Possibly. Support was untested despite today’s temporary dip.
The S&P set a higher low in late June, too.
On the other hand, the index is also buried beneath the 10-day moving average. It formed a double top – a bearish reversal formation – too, and the stochastic indicator suggests the S&P has plenty of room to fall before reaching oversold territory (a stochastic indicator reading <20).
Regardless, support at 3,7250.00 from late June/early July should be what decides the market’s short-term trend from here. If support holds, stocks could very well rally despite the tidal wave of headwinds approaching, including (but not limited to) earnings season and a July 22nd deadline in which Russia may or may not resume supplying gas to Europe via Nord Stream 1.
If support fails, goodbye bear market rally.
And because a strong trend has yet to develop, traders may want to target stocks that are less correlated with the general market. Realty Income Corp (NYSE: O) is one such company, and it actually did quite well over the last few months.
O failed to stage a true breakout past resistance at the late May highs before closing below its bullish trend (yellow trendline) several trading sessions ago. Today, O closed below the 10-day moving average and right on top of support (green line).
The stochastic indicator suggests that the stock has room to fall, too.
For those reasons, should O take out support (and today’s low), it might make sense to short the stock with a trade trigger of $67.35 as the general market continues to search for a prevailing trend.
