Hey There Income Hunter,
So far the new year is off to a quiet start …
But I’m calling for that to change after Thursday’s Consumer Price Index report.
Investors and traders have become obsessed with a Fed pivot back to printing money and are banking on a declining trend in CPI.
This month’s report is highly anticipated and expectations are for a significant decrease in year-over-year headline CPI to 6.5%.
This is the last important number prior to the Fed FOMC policy meeting on Feb. 1, so it will trigger portfolio hedging and rebalancing as the markets position for a .25% or .50% rate hike.
Today I’ll share where I think the index will come in and how to trade the market coming out of it.
Categories That Matter Most
The chart below highlights the categories that have reversed trends, including energy, vehicles and apparel.
Energy is always a wildcard. But over the past month oil prices have traded down and back, so there should not be much change on that front.
Vehicle prices continue to come down and auto loan delinquencies will continue to weigh heavily on CPI.
Apparel inventories remain high and consumer spending looks likely to stay weak in the months ahead.
Sticky Inflation Items
The chart below shows the top three categories in which prices have remained stubbornly high …
Electricity prices have turned down but they are a wildcard as supply shortages may ignite a resurgence of inflation as China reopens its economy.
6.5% Expectations May be Wishful Thinking
The quarterly prints for CPI are below. Notice the 7.2% forecast for Q4 as a whole (red box). These forecasts are a Bloomberg consensus and Hedgeye forecasts (the latter of which were spot on throughout 2022).
Now, 6.5% is a long way from the 7.2%, so Thursday’s number may be a bearish miss to the upside, which I don’t think the market is ready for …
The SPDR S&P 500 ETF Trust (SPY) chart below breaks down the key option positioning strikes that you traders can lean against as support and resistance levels.
If the market settles above 390 following the CPI report, there is a high probability of it also taking out the 393.70 high from Monday and testing the resistance at 400 or above.
However, if we do get a bearish miss, I am looking to get short for a move down to 380 into next Friday’s Jan. 20 monthly options expiration..
So, a bearish number tomorrow and a quick sale may pay off nicely – but this situation is fluid based on how CPI comes out versus the 6.5% forecast.
Bring It Home
My preferred trade for the next couple of days is to hold on to a couple of bearish strategies looking for the market to trade down into OpEx.
If we get a down trade, I am going to get long SPY or QQQs near the SPY 380 or QQQs 260 level.
A large number of puts will expire next Friday and dealers would need to cover their short stock hedges igniting a potentially powerful move back up.
Stay tuned for more on that later in the week.
Until then …
Live and Trade With Passion My Friend,
Griff