Soft CPI Ignites Short Squeeze in Bonds, Propelling Stocks Higher: What's Next?
Stocks rallied following the CPI report, as falling energy prices offset the rise in the net benefit of health insurance and other medical impacts. Energy and gasoline prices fell sharply, and so did owners’ equivalent rent.
There was disinflation in the used car prices and lodging. A 1/10 miss doesn’t seem like much, but rates are so highly leveraged and short that is all it takes to ignite another short-squeeze in bonds, not that different from what we saw in the Treasury refunding on November 1.
The options market yesterday was only pricing an 80 bps move in the market, in the S&P 500, and generally, the options market does a pretty good job at pricing event risk. Still, this time, it underestimated the implied move. Because the S&P 500 rose by roughly 1.9% and closed around 4,490.
As noted yesterday, the call wall had shifted to 4,450 and was at 4,450 again yesterday. However, the decrease in yields proved too much, and the S&P 500 was able to move beyond the call wall and rally to up the next significant resistance level in options ahead of Friday’s OPEX at 4,500.
Additionally, it overrode what, in my experience tends to be a relatively bearish technical pattern. But analysis is about a game of odds and managing expectations around the odds. We make the best decisions and conclusions based on the information we have.
It is about a process and the same process that I used to predict a rise in the inflation rate in August and September, the rise in rates, and the move down in equity prices, was the same process that didn’t work this time. Such is life.
The move higher yesterday certainly was not what I expected, given the historical trends for this CPI report and how the technical setup appeared to be positioned.
Bein
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