It has been a volatile few days in the S&P 500 index. On Wednesday, the index plunged as investors went risk off, mostly predicated on the cratering of the cryptocurrency markets. And the unknown of the October consumer price index reading made the bulls less aggressive during the steep decline.
In fact, the index closed just off its low for the day. Interestingly, the index began the premarket session Wednesday night at 6 p.m. right at the low from the previous day and quietly moved higher ahead of the CPI data.
Based on the weaker-than-expected reading of the CPI at 8:30 a.m. Thursday, FOMO (fear of missing out) trading was rampant. Investors who did not buy into the weakness on Wednesday were forced to buy into strength, which is a much more difficult task.
In addition, investors banking on worse-than-expected CPI and were short the index had to scramble for cover.
In what may be the biggest 1-minute green bar in the entire history of the index, it leapt nearly 110 handles, or 3%, (3,751.50-3,861) at the 8:31 a.m. mark.
The stocks in the index were following suit. In retrospect, even buying at those elevated prices has been profitable.
Bulls Vs. Bears: Without knowing what “tape bombs” are looming in the markets, the rare velocity of the rally cannot be underestimated. The bears will still maintain that this is yet another of several bear market rallies, and investors have been afforded another opportunity to lighten up their portfolios for more violent moves lower.
The bulls can argue, based on the weaker-than-expected CPI, that inflation has peaked and will continue to decline. As a result, the Federal Reserve will lighten the pace of interest rate hikes and eventually stop altogether. Next would be the Fed pivot, or the decrease in interest rates to stimulate the economy if it starts to slip into a recession.
Market Fundamentals: As detailed by Ryan Detrick, chief market strategist for the Carson Group, during Wednesday’s PreMarket Prep Show, the rally may only be getting started.
Based on post-midterm election price action, coupled with seasonality factors, including the Santa Claus rally, conditions are favorable for a continued move higher.
In addition, fourth-quarter earnings seasondoes not begin in earnest until early January, so trepidation over those earnings is on the back burner for now.
The discussion with Detrick from Wednesday’s show can be found here:
Technicals: It is easy to look to the left on charts and say “could of, should of, would of” and lament over the index now being more than 400 handles over the October low.
Furthermore, the distancing of the index from that low increases the likelihood that a major long-term bottom has been put in place.
Looking to the right on the charts is what is important to this investor. As of 1:45 p.m., the index was at its highest level since making the October low.
If the index can close above 3,911.25, a new benchmark to analyze the next move will be put in place.
For the bears out there, look out. If looking right at the S&P 500 index futures chart, there is limited daily resistance. In fact, the next daily highs do not come until the 3,980 area from mid-September, Those were put in the two days following the worse-than-expected August CPI.
Believe it or not, the daily high of significance is the pair of highs at the 4,150 area that was put in place, the day preceding and the day of the plunge on Sept. 13.
As always, investors must make investment decisions based on their individual portfolios and their appetite for risk. Nevertheless, the implications of Thursday’s robust rally are going to have the bears as well as investors on the sidelines lamenting they did not use the “buy the dip” strategy on Wednesday, or at any time during the last month.