Things you need to know ~
- CPI does NOT retreat, rather is becoming entrenched
- What was THAT?? Stocks collapse then surge higher
- Massive hedging being credited for the move
- Treasuries surged higher before pulling back
- Banks due to report any minute now
- Try the Pork Cutlet Milanese
It was a crazy day…..it started with a hotter than expected CPI print…that showed us that core inflation m/m went up by 0.6% – more than expected and y/y inflation after taking OUT food and energy – 2 groups that are very volatile – surged by 6.6% – more than expected and more than last month…and all that does is confirm that inflation is now becoming ‘entrenched’…..and for those of you that need a definition – here it is….
Entrenched means – firmly established, and difficult or unlikely to change. Ingrained.
Ok – now that we got that cleared up…we can all agree that it’s an issue….no?
So, when it hit the tape – the algo’s went into haywire…. running for the exits….as wave after wave of sell orders slammed the markets. Dow futures which had been 200 pts higher in the pre-mkt turned significantly lower…..and I mean significantly – – when the bell rang the Dow dropped by 550 pts (a 700 pt. swing) – before finding a bottom at 28,660 The S&P went from +40 to -85 (a 125 pt. swing)– making a new 2022 low at 3491, the Nasdaq went from +100 to – 329 (a 429 pt. swing), the Russell went from +14 to – 46 (a 60 pt. swing) and the Transports went from +80 to – 447 or (a 527 pt. swing) – leaving all of these indices down more than 2+% in the minutes after the opening…..in what felt like just maybe – the flush was upon us…..that moment of capitulation…..All of the indexes were now trading back at levels not seen since the summer/fall of 2020.
But after churning at the lows for about 12 mins – it became clear that it was not going to be….at about 9:45 am the “Plunge Police” were summoned….and then as quickly as stocks fell – they began to rise….and before you know it -stocks went positive…. And then continued to move higher as the minutes passed.
The move higher leaving many to ask – What was that all about? What caused the change in sentiment? Was it just a technical bounce off a well oversold position? How about some massive hedging? Data shows that professional asset managers/traders and institutions bought more than $10 billion in puts last week – a move that translates into a ‘bet’ of a decline in prices – which also means those bets for a decline have to be ‘reversed’ to close out those positions which creates ‘buyers’…. Capisce?
Yesterday those bets paid off handsomely when the CPI print hit the tape revealing continued upward pressure on prices….….Equity futures sold off – causing the puts to soar in value, – so those same institutions sold their puts to lock in the gains – causing the market makers to unwind their short positions – creating a massive buy wave…..and then that wave caused new money to jump on the bandwagon…..fueling an even more dramatic move higher….Which is why we did not see a spike in the VIX (fear index) yesterday morning…..– this wasn’t a fearful selloff – it was calculated.
OR – How about the idea that earnings might just be ‘less than horrible’ – I mean so far we’ve heard from 7 S&P companies – PEP, BLK, FAST & WBA and they all beat their estimates while DPZ, DAL, & PGR missed – but not ‘badly’ Forward guidance has also not been horrible….and just maybe – that helped as well.
In the end – no matter what you thought or how you explained it – what is clear is that the markets are volatile – that market dynamics – like it or not – are driven by sophisticated ‘automated’ quantitative strategies that control algorithms that can (and do) cause short term chaos….and if yesterday was not the perfect example of all that – then I don’t know what is.
You can also feel the anxiety as cross currents hit us from everywhere….a slowdown in earnings, rising bond yields, an inverted yield curve, central banks hellbent on destroying inflation that they all helped create while they try to maintain some sense of financial stability, a contentious mid-term election, a war in eastern Europe, an energy crisis across western Europe and an oil cartel that told Joey to shove it…. . And then we’ve got everyone opining on what the market is doing and where it will go….causing day traders to have a field day while long term investors get a headache….But remember – what I keep saying….the short term chaos while uncomfortable does create long term value for those that can see thru the mess and are able to stick to the plan.
By the end of the day – the moves were ‘stunning’ really – the indexes swinging 5+% from low to high…. – the Dow gained 827 pts or 2.85%, the S&P rose 93 pts or 2.6%, the Nasdaq rose 232 pts or 2.2%, the Russell gained 41 pts or 2.4% and the Transports added 125 pts or 1%.
On the earnings front we heard from DAL +4%, BLK +6.6%, WBA +5.3%, FAST + 2.4%, PGR +0.8% & DPZ 10%…. and while DAL, DPZ and PGR missed – it didn’t seem to be an issue…none of that made any difference at all – they ALL closed higher…..….when stocks started to run, they all ran…..Every sector in the broad S&P ended up….Financials outperforming – XLF rose 4.1% – ahead of today’s bank reports. We will hear from JPM, C, USB, MS, WFC – all before 8 am.
Energy – XLE was in 2nd place – rising 4.08%, Tech – XLK up 3.1%, Basic Materials – XLB + 2.9%, Utilities – XLU + 2.5%, Communications – XLC +2.4%, Healthcare – XLV +2.3% Industrials – XLI +2.2%, Real Estate – XLRE + 1.8%, and Consumer Staples – XLP +1.6% and Consumer Discretionary – XLY +1.1%.
The Semi’s – SOXX – which have gotten crushed gained 2.9%, but NVDA added 4%, INTC +4%, AMAT – which just warned of a disappointing 3rd and 4th qtrs. also gained 4.5%. The Value Trade – SPYV gained 2.8%, and the Growth Trade – SPYG gained 2.4%. Interestingly enough – the Cathie Woods trade – Disruptive Tech – ARKK lost 0.2%….that’s right – it fell today…so think of the names in that ETF…TSLA, ROKU, COIN, ZM, & BEAM…to name just a few – names that you may NOT want to be in if the ‘recession’ hits…..I’m telling you that the action in those names is telling you that the recession has already hit…..but Press Sec KJP continues to tell us that we don’t understand to try and convince us that we don’t understand. Whatever!
Cybersecurity and Artificial Intelligence both gained 1.6% and 1.7% respectively…. Homebuilders only gained 0.2% – and that makes sense since 30 mortgage rates are now solidly in the 7% range…Airlines – JETS gained 2.2%, Metals and Miners rose by 1.7%, all while the VIXY (fear ETF) fell by 2.9%.
As you might have expected the strong CPI report sent treasury yields surging…..the 2 yr. hitting 4.5%, the 5 yr. hitting 4.3% while the 10 yr. hit 4.07%...30 mortgage rates for conforming loans with a >740 credit score pierced 7% and if you have < 740 credit – you’ll be paying closer to 8%.
Watch what happens to housing data and prices now…
US futures continued the ride UP overnight…. this morning though – they are lower…. Dow futures are down 50, S&P’s – 10, the Nasdaq is lower by 50 pts, and the Russell is down 1. Yesterday’s CPI data surely keeps the heat on the FED and the sharp rally – while welcomed by so many – was NOT the signal that everyone is looking for. That signal won’t come until we get more clarity on earnings and forward guidance, the pace of inflation, the depth of the recession, the strength of the job market, the outcome of the election, the energy situation in Europe, the energy situation in the US, the ongoing war between Russia/Ukraine, the potential takeover of Taiwan by China, the end game by the FED and other central banks, …..so I guess what I am saying is – sit tight…think about the ‘long game’…..
The focus today is squarely on the bank earnings…. more importantly – how much are these guys putting aside in loan loss reserves? Because that will tell you what they really think about the future of the US economy. Word has it that they are building a ‘large’ reserve funds to offset what is expected to be a wave of defaults…. Earnings have been revised lower and so don’t be surprised if we see ‘beats across the streets. The talk has been how the banks are supposed to surprise to the upside! And that is all very orchestrated as well…..don’t kid yourself!
Eco data today is all about the strength of the consumer…Retail Sales due out at 8:30 am Top line expected to be up by 0.2% – Ex Autos and gas – also up by 0.2%. U of Mich Sentiment Survey expected to be 58.8, 1 yr. inflation expectations of 4.6% and 5 yr. – 10 yr. expectations of 2.8%. Again, that last data point – I think is useless….
Asian stocks all closed up on the day…. markets in the region up by more than 2.5%.
European stocks opened higher and are also continuing that move up. BoE (Bank of England) Governor Andy Bailey is supposedly shutting off the spigot and ending the emergency bond buying program announced 2 weeks ago…UK finance minister Kwasi Kwarteng reiterating that he and PM Truss are totally focused on delivering their growth plan – so any talk of a pivot or U turn is nothing but talk – until it isn’t……just sayin At 6 am -markets across the region are all up by more than.
The S&P closed at 3669 up 93 pts….after the swing lower took it to 3491…..which now puts S&P 3400 in the line of sight…..I mean – once we broke 3500 it added a new dynamic to the 2022 trading range….and with 3 months to go and lots of expected hits still to come – we can’t discount another test lower… the 28th brings us the PCE deflator and that is expected to be hot, November 2nd brings us the next FOMC meeting….the focus will be squarely on what they are hinting at for the December meeting – because we know what the November meeting is bringing. And don’t forget – the November CPI, PPI and PCE numbers are all expected to be higher because energy has surged by 25% this month and that will be reflected next month… (note: nothing has declined enough to offset the rise in food, shelter and energy so expect inflation to become even more entrenched) …….
Listen – as a long-term investor – just stick to the plan…. take advantage of dollar cost averaging (DCA) and dividend reinvestment programs. Overweight the big boring names – buy the stuff that people need (STPN).
Take Good care
Chief Market Strategist
kpolcari@slatestone.com
Pork Cutlet Milanese
This is a great dish – easy to make and a pleasure to serve.
You start by making the Tomato Bruschetta – get some nice ripe plum tomatoes – maybe 7 or 8… dice and add to a glass bowl… 3 or 4 cloves of garlic… now crush two of them and then slice the other two – add to bowl… fresh basil – chopped, s&p, olive oil and diced red onion… (I love red onions so the more the merrier – but you figure it out…) Cover and let marinate… do not refrigerate…
Next the Pork Cutlets – Pound thin then Rinse and pat dry. Beat a couple of eggs and set aside. Prepare a bowl with Italian seasoned homemade breadcrumbs – set aside. Prepare a bowl with flour – set aside. Make the assembly line – Flour, Egg wash then breadcrumbs.
Pour some olive oil in a broiling pan and turn broiler on high. You want enough so that you cover the bottom of the pan – but you do not want the cutlets bathing in oil… place the rack on the second level below the broiler.
Dredge the cutlet in the flour then dip in the egg wash and then dredge in the homemade breadcrumbs making sure to coat well on all sides. When the oil is hot, place the cutlet in the broiler pan and turn over so that the seared breadcrumbs are now under the broiler. Cook for about 5 mins or until a nice golden brown. Flip the cutlet and broil the other side – another 4 / 5 mins or so. Remove.
Now the presentation… You need to make a bed of greens on the plate – maybe fresh spinach, or arugula, or Boston bib – you can mix or use just one… Next place the broiled cutlet on top in the middle – looks good, no?
Now – using a spoon – add the bruschetta on top of the cutlets – this is a colorful dish…you have the green from the greens and you have the red from the tomatoes… It is like eye candy…
Serve with a red wine of your choosing… I like a Chianti Classico or a Pinot Noir with dish – but you can choose whatever makes you happy.
Buon Appetito.
