An Extremely Bullish Parallel | Morning Express 10/06/2022

Posted: Oct. 6, 2022, 8:51 a.m.

E-mini S&P (December) / NQ (December)

S&P, yesterday’s close: Settled at 3794.00, down 9.25

NQ, yesterday’s close: Settled at 11,623.75, down 17.00

Fundamentals: A pattern is evolving in this market, and it would be extremely bullish for stocks. We see similarities between June’s quarterly close and that for September, as well as the onset of the new quarter that followed, trading in the first few days of July and October. U.S. equity benchmarks took a violent turn south after May CPI data came in hotter than expected on June 10th. This forced a more hawkish hand from the Federal Reserve in the following days, and sentiment became excessively negative. Sound familiar? It should. Equity markets again sold off sharply on September 13th, after August CPI data came in hotter than expected, and Fed rate hike expectations levitated in the aftermath. Yes, June did not finish on the dead low as September did on Friday, but patterns can evolve in a more extreme manner, not for the least of which because analytics are predicting such possibilities; downside and upside can be sharper, and therefore within a narrower timeline. The S&P rallied 3.6% from June’s settlement to a peak in five sessions, whereas it just surged as much as 6% over the last three trading days, the first of October. So where to now? The stage is set for another historic rally, just like July carried us through the start of August, but it is all about the data. Tomorrow brings a pivotal Nonfarm Payrolls report, but next Thursday’s CPI is 'make or break'.

Ahead of the August CPI report in September, the Morning Express was titled ‘Risks Are Skewed to the Downside’. At this level, we see the exact opposite, and amid excessive negativity, portfolio managers are broadly offside, like the June CPI report released in July. Of course, tomorrow’s NFP will move markets, price action could be much higher or lower. However, like June’s CPI data in July was on the heels of a hot read for May, September’s read next week is the encore of that hot August read. In fact, June’s CPI was hotter across the board than expected, but markets refused to go lower because risks were skewed to the upside and excessive negativity.

Who would we be if we did not play devil’s advocate? One underlying bullish catalyst for the July through August stock market rally on the heels of hot June CPI was our main summer theme, ‘The Inflation Showdown at Jackson Hole’. What was the direction of inflation heading into September? When June’s CPI was released on July 13th, indicators had already signaled a significant slowdown for July's CPI. The difference this time is that early indicators for October's CPI appear to be trending hotter.

Do not miss our daily Midday Market Minute, from yesterday.

Initial Jobless Claims this morning helped jolt price action a bit higher after coming in at 219,000 versus 203,000 expected. Later today there is a deluge of Fed speak, to include Chicago Fed President Evans, Fed Governor Cook, Fed Governor Waller, and Cleveland Fed President Mester, all to begin at 1:00 pm CT.

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