The stock market had its best day in over two years last week. Nearly a 6% rally in a single session.
Even back during the bull market, a move like that would be an outlier. Today, it seems like a miracle.
That move came because of a slightly lower inflation number than expected. The Consumer Price Index rose “just 7.7%” in October, while economists expected 7.9%.
Let me ask you, though… Did you look into the details of the report?
Many don’t, and I understand why. The headline number, after all, is what the market reacts to.
But if we want to understand what’s likely to happen over the following weeks and months, we need to dive deeper into the dirty specifics of that big, optimistic number.
In today’s True Options Masters, we’ll do just that. And by the end, you’ll likely see last week’s rally as what it really was: more of a trading opportunity than a buying opportunity.
Unpacking the Inflation Beat
Let’s dive deep into the Consumer Price Index report and see what’s really going on.
The lower October inflation number was almost completely due to lower inflation for medical services. That wasn’t unexpected. The Wall Street Journal actually warned of that drop in late October.
The Journal explained that the CPI uses health insurer profits to calculate inflation. (I can’t understand why that determines what we pay for medical care, but let’s just assume there’s a good reason for that.)
In addition to being an incomplete measure of spending, it’s reported late. The data lags by 10 months. The October report was based on data from 2021.
The decline is due to the pandemic. Profits soared in 2020 when consumers stayed home. That increased CPI starting in October 2021. Profits are now returning to normal… That’s reducing inflation now.
The price of non-energy goods also fell, which was good news…
But that’s where the good news ends. Non-energy services and rents — two big inflation drivers — continue to accelerate.
What does all this have to do with the S&P 500? It shows traders got ahead of themselves.
Inflation is still hurting businesses and consumers. Unemployment will still rise. The economy is still hurtling into a recession. These are fundamental factors, and fundamental factors take time to change. It’ll take a lot more than one monthly CPI report.
But, as you know by now, I value technical arguments more highly than fundamental ones. And those give us good reason to believe this is just another bear market rally…
History Says We Haven’t Hit Bottom
The biggest problem with last week’s rally is that breadth and volume didn’t confirm a bottom.
The chart below shows the ratio of upside volume and breadth for the S&P 500 Index. Volume measures the percentage of trades that occurred at higher prices. Breadth shows the number of stocks and ETFs that closed higher for the day.
On Thursday, upside volume reached 90.8%. Breadth was 88.3%.
(Click here to view larger image.)
Historically, both volume and breadth top 90% when bear markets bottom. That’s been true of every major bottom since the 1960s when breadth data became available.
Maybe this time is different. But more than likely, we should expect new lows for the stock market next year.
That doesn’t mean you should start betting against stocks every day. Bear market rallies, as this past summer proved, can sustain for several weeks or months. This one could easily last through the end of the year.
The chart above is constructive for that. Note the blue lines marking the top and bottom of the October rally. The red line through the middle is right where the recent pullback stopped – 50% of the rally. That’s a normal, healthy retracement.
With prices now above the October high, we can expect continued gains.
Still, this is no time to shop for new long-term positions. It’s a time to take short-term trades that give you the potential to multiply your position several times over.
That’s exactly what I’ve been doing with my money, and recommend my subscribers do, all year long. And we have a 78% overall gain to show for it, while the stock market has fallen as much as 25%.
We’ve done this by targeting just one rapid-fire trade each week, on a single household name ticker. Decades of studying this ticker have culminated in my absolute favorite trading system… with single-day returns of 115%, 140%, and 142% all on the books.
Good times or bad, I can rely on my trading system to exploit this ticker for rapid-fire gains. And it works just as well in bear markets as it does in bulls.
I bring this up because I’m hosting a special talk about this system tomorrow at 8 p.m. ET. There I’ll teach you how to trade in bear or bull markets… with the one ticker that’s proven more profitable than any other.
I couldn’t have asked for better market conditions to unveil this to you. During the last bear market rally in July, the system went on a five-trade win streak with gains of 65%, 81%, 89%, and 101% – with all but the last one taking just a single day to play out.
We’re now setting up for a similar opportunity through the end of the year. So you must make sure to be there.
All you have to do is click this link to confirm your attendance, and I’ll see you tomorrow night.
Regards,
Michael Carr, CMT, CFTeEditor, True Options Masters
