A Cool CPI Report Might Not Actually Be the Good News Investors Expect

The market is holding up quite well after a big recent surge. Consolidation and rotational action have been underway in the overall market over the last five sessions, with the S&P 500 trading in a tight range. That is healthy after a sizable move, but the question is whether this is a pause that sets up another push higher or stalling that leads to a deeper pullback.

My concern is that with earnings season mostly over, investors have to look to macroeconomic catalysts like the consumer price index report, the price of oil, and interest rates. All three of those are problematic right now. When combined with slow August trading and negative seasonality, the conditions for strong upside are suboptimal.

The CPI Risk Runs the Other Way

The July CPI report hits this morning and is expected to be mild at around 0.1%. I am not sure that those expectations are well grounded.

June was the month energy collapsed and we saw it in the much better than expected June CPI report. Prices fell 5.7% for the month with gasoline down 9.7%, and that single category produced the surprisingly cool reading.

July was the opposite for much of the month. Crude ran from the low $80s to above $100 on the Houthi attacks and the Red Sea escalation, with gasoline averaging over $4 nationally in the third week of the month. The break did not arrive until the last few days of July, when Pres. Donald Trump halted the strikes and crude fell back under $80.

The energy contribution this month is going to be a positive number, not a negative one like last month. The bond market appears to be positioned for this. Interest rates have gone almost straight up since the cool June report, which tells us that investors treated that number as a one-month energy aberration rather than a trend. The 20+ Year Treasury Bond Fund (TLT) is sitting not far off multi-year lows.

Parts of AI Are Working

Underneath the indexes, we’re seeing a split in the AI trade that is triggering some rotational action and keeping things steady.

CoreWeave (CRWV) jumped over 15% in premarket trading after posting its fifth straight quarter of record revenue on sustained AI demand. Super Micro Computer (SMCI) gained more than 7% after reporting surging profit with sales nearly doubling in the fourth quarter.

Those are the companies actually delivering infrastructure, and they are putting up good numbers. Meanwhile the Mag7 is struggling and the chips have been volatile without establishing any direction. The buyers of AI capacity are being questioned while the suppliers who can show the revenue are being rewarded.

This is not the AI trade working or failing. It is the market sorting out the companies that can prove that spending is paying off versus those that still have questions about profit margins.

The Rotation Continues

We saw money move into small caps on Tuesday with the Russell 2000 (IWM) gaining while the senior indexes fell. Breadth was 57% positive with 185 new highs against 95 new lows.

That rotation has been the quiet story of this market for weeks, and it is why the indices have been pretty useless as timing tools. Technology remains a difficult sector to trade while biotechnology hits new all-time highs, but you’d have little feel for that action if you are looking at the indexes.

Game Plan

So far things are holding up and one of the big positives is that the bears are leaning the wrong way as they anticipate negative seasonality. They have a valid point but we have to defer to the price action which is still solid in many places.

I’m not a bear but I’m playing strong defense. I am focused on small caps and biotechnology because that is what is working, I have plenty of cash, and I am selective about entries. The macro backdrop is not supportive, the calendar goes quiet after this week, and a market that needs good news to keep going is about to run out of possibilities.

We’ll see how the market handles CPI this morning. It may provide an excuse for more aggressive profit taking.

At the time of publication, DePorre had no position in any security mentioned.