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The third straight monthly higher-than-expected CPI inflation report spurred selling in equities, today, as expectations for a potential Fed rate hike were (again) pushed out. Both the month-over-month CPI, and the core CPI (which excludes volatile food and energy prices), for March came in at 0.4% versus the 0.3% consensus expectation. And the year-over-year (annual headline) number for both measures also came in above estimates, and above the prior month’s number. Both are still well above the Fed’s 2% target.
Back on April 1st, I suggested that investors error on the side of stubborn/sticky inflation when making their sector weightings, and I think they should continue to do so for the foreseeable future.
Treasury yields rallied on both the short and long-end after the hot CPI report, with the 10-year yield jumping to 4.54%, its highest level since mid-November. And Fed fund’s futures are now pricing in expectations for just two 0.25% rate cuts (later) this year, when in late 2023 six rate cuts were expected for 2024.
The S&P 500 kept its losses to less than 1 percent on the day, but the action was worse below the surface, with breadth being quite poor and the small-cap Russell 2000 index down 2.6%. The S&P 500 continues to grind its way down towards a test of its 50 dma.
The mega-cap, tech-heavy Nasdaq 100 is again teetering on its 50 dma, with key short-term price support at 17,808; its mid-March low. If long-term Treasury yields continue to rally, we’re almost certainly likely to see a Nasdaq 100 breach of its 50 dma and a test of that 17,808 level.
As I already mentioned, the small-caps got beat up today for the tune of 2.6%, with the Russell 2000 index breaking below its medium-term uptrend channel and its 50 dma. A move and close below its March low makes a further decline and test of its 200 dma quite likely.
Despite reduced expectations of Fed rate cuts, and a rally in Treasury yields, I don’t see the market completely falling out of bed at this time unless Treasury yields rally significantly. Good economic growth and solid overall earnings growth will likely keep a pullback in the major indexes somewhat contained, and I continue to expect that the major indexes will be range-bound for the medium-term.
The key is to identify stocks and sectors that will outperform in such an environment, and those that will underperform — creating shorting opportunities. Again, see my April 1st newsletter for further discussion on this, and I’ll elaborate more over the weekend.
I mentioned earlier that breadth was quite weak today, despite the modest decline in the major indexes not reflecting it. Declining stocks outnumbered advancing stocks by 6 to 1 on the NYSE, and 3.5 to 1 on the Nasdaq. Small-caps are generally more sensitive to higher interest rates and yields, so most of the better-quality shorting opportunities will be in that area.
That’s it for now, I’ll elaborate further over the weekend. And as always, I’ll be posting frequent market commentary on WMI’s private Twitter (X) page.
Now, on to a new/updated long & short focus watchlist.
Focus Watchlist
I try to recommend trades that are timely and that a breakout/breakdown is likely to occur soon. If I take a stock or ETF off the focus watchlist, it may be because the trade needs more time to ripen, it ran away from us, or I’m no longer considering it at all.
Longs:
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