Market Brief – Friday 1/11/19

The Consumer Price Index (CPI) came in at 1.9% year-over-year after holding at 2.1% YoY for the last two months. Today’s print is just high enough for the Fed to justify their December rate hike, while also giving them some latitude to pause. Fed Chair Powell said that he expects inflation to be around 2% this year, which so far, the data confirms.

Those that understand housing and energy prices are the two largest components of the CPI, also knew the index was soon to peak and roll over. This is part of the reason the “Smart Money” and the banks are buying bonds. After the report, Treasury yields fell across the board.

The post-Christmas rally is one to be rented, not bought, as is it more for traders than long-term investors. Bear markets do create the biggest short-term opportunities, but they can also create very rapid drops. With 2,600 on the S&P 500 as a major resistance level going back the past 12 months, this is not the price level to buy. There will be a greater opportunity which I will discuss in next week’s update.

Without the Federal Reserve providing support to asset prices, the stock market is finally starting to behave as it should, meaning price and volume fluctuations are starting to follow discernable patterns. Over the past week, the S&P 500 has come up to 2,600 where it spent the last three days trying to unsuccessfully break above. There are two tell-tale signs to suggest this rally has peaked.

The first is volatility. Most people don’t understand how stock-market volatility works. Think of volatility as the gas pedal on a vehicle and stock prices as the speed of a vehicle. As the gas pedal is depressed further, the vehicle should accelerate, which is why there is generally an inverse relationship between stock prices and volatility. When volatility falls, stock prices should be rising.

Over the past three days, volatility has continued to fall, while stock prices have plateaued. Based on volatility, the S&P 500 should be about 50 points higher than it is. As investors continue to push down the gas pedal, the vehicle is no longer accelerating, which means stock prices have peaked in the short-term.

The secondary sign is trading volume. In a strong rally, trading volumes should increase each day, which indicates more buyers wanting to purchase stocks. When trading volume starts out high and then tapers, as it has over the past week, it is a sign the buyers are getting exhausted or are out of capital they wish to use to buy more stocks. Over the past week, trading volumes started out above average, have fallen each day, and closed the week at a very low level.

Based on the S&P 500 failing to crack its overhead resistance, volatility falling without stock prices rising and trading volumes falling, it suggests this rally is about over.

With earnings season starting on Monday, with the banks leading the results, it’s likely investors over this past week will find out why the big money has not joined them in this buying spree. Banks have been buying massive amounts of Treasury bonds, so keep that in mind. Most earnings projections have been negative, and its likely more companies will be reporting earnings below analyst expectations, which is not bullish for stock prices.

Treasury yields closed lower, but it didn’t stop short-sellers from coming back to the Treasury market even after today’s CPI report indicated that inflationary pressures are falling. Next week the U.S. Treasury will be auctioning off large amounts of bonds while the Fed has planned to destroy more money as part of their balance sheet unwinding program.

Physical gold can’t seem to crack $1,300 and the gold miners can’t break overhead resistance. With trading volumes falling on the gold miners, it does suggest a pullback in prices is coming.

After falling below its 50- and 100-day moving average on news of no-trade deal, agricultural commodities closed right on its 100-day moving average, with its 50-day moving average just a fingertip away.

With earnings season starting next week, stock prices are set to fall as bond prices are set to rally.