Bullish versus bearish narrative in the market
One of the primary rationales for recent market strength is the argument that inflation has peaked and that the Fed will “switch” to a more pessimistic stance sooner rather than later. The sharp decline in oil, gas and commodity prices gave the argument some impetus, but the big movement in the market created the possibility of “selling the news”.
The market has been pricing in this optimistic view of inflation and ignoring even the hawkish comments from Fed members in recent weeks. The market has woven the very strong jobs report for July as a positive report rather than a potential inflation.
Wednesday’s CPI report will lead to more close examination of issues of inflation, a hawkish Fed, and a possible recession.
The bullish idea is that the worst has already been fully discounted, which is why there was a strong move from the June lows. The bearish narrative is that there is still a huge amount of economic uncertainty to contend with and that the recent strength has been primarily due to a bad situation rather than a major shift in the macroeconomic environment.
This is the setting for tomorrow and what we see today are some sites in front of the news. There is some concern about the “selling news” reaction, and this is causing a moderate selling so far. The widening of the range is more than 2 to 1 negative, and the speculative action has slowed down significantly. The lowercase letters are lagging, and most meme plays and short presses have lost their momentum.
I raised money during the recent rally and I continue to be on a very high level of caution. My feeling is that with negative seasonality still in play and plenty of economic data ahead of the upcoming Fed meeting, there is a high risk of some corrective action being taken. I’m not terribly bearish, but I plan on playing some solid defense for now.
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