How the CPI house of cards will impact you

Dear Reader,

The S&P 500 rocketed 5.5% after a lower-than-expected CPI number hit the headlines.

One headline read “Inflation cools much more than expected in October.”

“Much more?” we’re talking a core reading of 6.3 percent from the prior reading of 6.6 percent – a .3 percentage point drop.

Listen, we’re not going to feel much financial relief with meager declines like this, so we’ll have to look at other ways to deal with inflation.

So I don’t want us to fall for this inflation reduction fake-out. Experience tells me there’s much more pain ahead.

While other people try and play a rally that’s got no real staying power, I want us to focus on rules-based option trading in the short term – a solution that works well in choppy and volatile conditions.

The lure of October’s CPI report is the headlines, not the substance inside.

The headlines touted annual inflation is 7.7%, down from September’s 8.2%. But when food and energy sectors dipped only a hair below the prior month’s 6.6%, they’re still at 1982 levels – an era of inflation you’re probably still trying to forget.

Inflation declines like these are small enough that we’ll probably not find much relief when it comes to our day-to-day budgets.

Also, let’s not forget that food and energy are removed from the Core reading because of volatility. However, two of our greatest household expenses include food for the vehicles and food for our bodies.

Fuel prices increased year-over-year by 17.6%, while food jumped 10.9%. Then when we consider other another household expense, shelter, we find it increased 6.9% year over year.

That makes three substantial and fundamental items that increased – which can put an even larger dent in our pocketbooks.

Well, with this “good news” from the CPI report, the market had its best day in some time.

The market rallied in a single day, but not with strong confidence.

I look at the volatility index (VIX) to get a sense for investor fear – whether it’s rising or falling. It’s a confidence meter you might say.

This past July I saw the S&P 500 rally 4.5%, and as it rises, implied volatility should fall – which it did by 12%.

Yesterday we witnessed the index rise an even greater amount – 5.5%. As I consider the impact it had on the VIX, I noticed it dropped by only 10% – which leans towards investor caution as the market spiked higher.

Fast, strong market moves like we saw yesterday are often driven by emotions, not fundamentals, which is why I look to past market patterns for guidance and solutions.

I trust market patterns, not headlines or single-day economic reports.

Although news like yesterday’s CPI report can super-charge emotions and market reaction, the general trend and price patterns over time is more revealing.

After all, another media headline can surface tomorrow and send the market in a different direction – and when things like this happen, you can count on emotions being involved.

It’s why I’ve spent decades looking at stock price patterns, and then identified ways to filter out the noise – the choppiness of the market caused by emotional reactions like we’ve seen this week.

Despite the market’s knee-jerk reactions at times, my Quantum Scripts software identifies trading opportunities like the option trade on SQM, which yielded a 100% gain on half the position this week.

So, as the market is volatile enough to swing 15% or more back and forth in fairly short periods of time, I look to a more thoughtful, rules-based, approach to trading rather than getting caught in the headline snares like this week’s CPI report.

Until next time,

Tom Gentile
America’s #1 Pattern Trader

Join Tom each Monday through Wednesday at 12:00 p.m. ET as he discusses a range of strategies to make money in a strained market environment.

Did you miss the Live session? Watch Tom’s replays!

Leave a Comment

View this page online: