The Week Behind 

While there was no shortage of volatility, the major indices remained relatively unchanged ahead of Thursday’s CPI report. September Core CPI came in hot at 6.6%, a new peak, causing stocks to gap lower at the open. The NASDAQ and S&P made fresh 52W intraday lows. However, within the first 30 minutes of trade, the S&P 500 bounced off of the 3,500 level, triggering a massive short squeeze. Stocks ended the day higher when they had every reason to close lower. However, on Friday, despite strong bank earnings, stocks gave back some – in some cases, all – of the short-squeezed gains. On the week, only the DOW ended higher. The DOW gained 1.15%; the NASDAQ dropped ~3%; the S&P lost ~1.5%.

Highlights

• In observance of Indigenious People’s Day, U.S. Bond Markets were closed on Monday. Without bond yields, equities broadly traded inversely to the US Dollar.
• The FOMC Minutes reaffirmed the apparent hawkish-lean within the committee. The consensus view is that the risk associated with over tightening is not as great as the risk associated with not tightening enough.
• September Core CPI came in 6.6%, a new peak for the cycle, all but guaranteeing a fourth consecutive 75bps hike at November’s FOMC meeting.
• US2YR and US10YR finished the week at new highs: ~4.5% and ~4%, respectively.

A Pause For The US2YR

After Thursday’s hot CPI, FED Funds Futures priced-in an additional ~25bps to the terminal rate. The consensus is now 4.5 – 4.75%, which prices-in 75 bps hikes at meetings in both November and December. Simultaneously, the US2YR jumped 20bps, an oversized move for the bond yields, from 4.3% to 4.5%. It appears as though the low end of the terminal FED’s Funds Range acts as the cap for the US2YR. For the next couple of weeks, there is nothing to influence FED Funds Futures: no major economic releases, no FED meeting until November. Concisely, I expect the US2YR to remain at these levels or even decline, which may provide the breathing room necessary for stocks to build off Thursday’s squeeze and be fairly evaluated at earnings. 

The Week Ahead

Earnings season has begun in earnest. Last Friday, we heard from a handful of banks: JPM, WFC, MS, C. The first half of the week will be more of the same: BAC, BK, GS, and others. Aside from their own performances, bank earnings garner so much attention because of the insight they provide on their customers: from the everyday person to the Fortune 500 company. Strong bank performance suggests strong consumers and businesses, which, in turn, suggests strong earnings within the rest of the economy. So far, aside from MS, whose shortfall was primarily related to investment banking, banks have provided some bullish tea leaves for earnings.

Plenty of new economic data to digest this week. On Wednesday, the Beige Book releases alongside building permits and housing starts. Thursday, we get our weekly dose of initial and continuing jobless claims alongside existing home sales. On each day, investors will get an update on the labor market alongside an update on the housing market. Friday, inflation expectations are updated. While this data is relevant to the FED, I do not foresee any of these releases being impactful enough to change the macroeconomic conversation as set by Payrolls and CPI. Consequently, I expect earnings to be the main focus of conversation and price action. 

Any Juice Left to Squeeze Out of the Shorts?

Despite giving back some of Thursday’s gains to end the week, many bullish technical patterns remain intact. It provides a good opportunity for earnings to act as a bullish catalyst to turn these technical patterns into lucrative breakouts. If my thesis on the US2YR is correct, then we could see a nice rally over the next couple of weeks, especially in stocks that report positive earning surprises. 

However, the dominant bear trend is still intact: lower highs and lower lows. Consequently, with respect to tactical positions, I’ll look to take profits between 3,800 and 3,900 on the S&P 500. In my mind, much like how the bulls were rejected at the S&P 500’s 200d SMA during the last bear-market rally, bears just got rejected at 3,500. Next time the bears eye 3,500, they may have their way. The dominant trend is in their favor.