Everyone seems to be getting very bullish right now, but is that the right position for the market participants? Are there red flags that could signal an outlier move to the downside is coming? Or is this going to simply be a grind higher with a solid trend for a few months?
The big concern for much of the market for the last year has been high inflation that has been battled by many rate hikes from the Fed, and the next CPI data will be coming out around the same time as this e-mail goes out. I’m preparing for the worst on it, but since I can watch the number and the market reaction before making a move, my preparation may go out as a bit unnecessary. But I’m doing my homework anyway so I’m ready and have a game plan if the CPI data comes out on the high side, as that could signal further rate hikes are coming from the Fed.
Let’s look at some market indicators that make me a bit concerned about the inflation numbers. First, I like to look at some core commodities like oil and gold, represented here by the ETF’s GLD and USO:
As you can see in both charts, these commodities are near highs. That’s a bit concerning as it indicates commodity prices are rising. We can see similar in the ETF DBC, which is a basket of commodities:
Next, I see TLT is trading near highs, meaning the market has been lowering expectations of rate hikes throughout this rally:
And finally, I see that INFL, an ETF designed to hold stocks that are expected to perform well in a higher inflation environment is breaking out:
What does all of this mean? To me, I see the expectation for rate hikes falling while the market is also pricing in higher inflation. So, I need to be prepared for some market downside if the CPI is higher than expected today, and I love getting leverage via options when the VIX is at recent lows. This is a potentially explosive outlier setup, and I’ll be looking at names with potential big breaks for my next Outlier Watch List.
So please go to http://optionhotline.com to review how I traditionally apply technical signals, volatility analysis, and probability analysis to my options trades. As always, if you have any questions, never hesitate to reach out.