Stocks jumped again this afternoon as the recent rally flirted with a full-blown short squeeze. The Dow, S&P, and Nasdaq Composite all shot higher in anticipation of a cool inflation reading due out tomorrow morning.
That’s right, the August Consumer Price Index will be released before the market opens tomorrow, and expectations of a bullish print are high.
But will a low inflation number be enough to knock the Fed off a 75 basis point rate hike in a few weeks? Probably not.
“Despite better CPI numbers, we expect the Fed to continue on its path for another 75 basis point hike later this month,” said Global X ETFs chief investment officer Jon Maier.
“Tighter policy lags; thus, the tightening by the Fed may be working better than the numbers show, but given their intent on being aggressive, there is a good chance they may be over-tightening which will impact growth and market volatility.”
Speaking of volatility, the VIX climbed right alongside the market today, indicating that a “bull trap” may be forming. The S&P is also reading as overbought on the stochastic indicator, suggesting stocks are due to rebound lower soon. A bad CPI print tomorrow could easily be the catalyst for a trip back down to 3,900 for the S&P, a level of support that the index touched before surging through the end of last week.
“That 3,900 level on the S&P 500 is important technically, and the move that we saw off of it has been fairly strong at this point. I don’t know if it is strong enough to call it a very clear reversal, but in terms of the breadth and strength of the bounce it has been reasonably encouraging,” explained Bryn War Trust’s Jeff Mills.
And though stocks rallied, bonds did not. Rising yields poked holes in the theory that a longer-term bear market rally was almost here – something Mills also noted.
“You saw this in the June rally as well where the market kind of bought into this possibility of a Fed pivot or a less-difficult outcome for the economy, but the bond market never really did. […] And by and large, that’s what you saw last week as well.”
That’s why traders may want to target stocks less correlated with the general market, like AstraZeneca (NASDAQ: AZN), which just set a double bottom last week before surpassing its bearish trend (yellow trendline).
The stock rallied today, closing above the 10-day moving average, too. The stochastic indicator suggests that AZN has room to run also.
For those reasons, it might make sense to take AZN long with a trade trigger of $62.80, above today’s high, as the general market awaits tomorrow’s CPI print.
