Elevated Volatility Is a Warning Sign as the S&P 500 Hits New All-Time Highs

The S&P 500 is trading at new all-time highs on Friday morning as investors await the delayed September CPI report. It is expected that inflation upticked to 3.1% from 2.9%, but the market is confident that the Fed will cut interest rates by a quarter point next week.

The CPI will likely generate some short-term movement, but there are no significant concerns at this point. Investors are more focused on the slowdown in employment, and that is offsetting the inflation issue.

Investors also appear optimistic about President's Trump’s meeting with President Xi, scheduled for next week. There seems to be some progress on a deal, and the market just isn’t as concerned about tariffs as it once was. Trump indicated he is cutting off trade negotiations with Canada, and the market reaction appears to be a shrug.

Next week, earnings reports will take center stage as the Magnificent Seven reports start to hit. There doesn’t seem to be too many worries about negative surprises, but are expectations too high?

Technically, the indexes are holding up very well and are close to their highs, but elevated volatility is a warning sign. According to IBD, there have been five distribution days for the S&P 500 so far in October, meaning five days with declines on higher volume. That indicates a weakening in demand and needs to be monitored.

So far, there has been strong support, with many stocks bouncing back, but some of the leading names in hot sectors have not. Gold mining stocks (GDX) , for example, had a very mild bounce on Thursday but are still far below the highs they hit a week ago. They are lower again on Friday morning.

My best advice is to play stronger defense and not let gains slip away. Also, please keep in mind the risk of holding stocks until their earnings reports. That is especially important for smaller stocks, which are more likely to surprise to the downside than their big-cap cousins.

We have a positive start as we await CPI.

At the time of publication, Rev Shark had no positions in any securities mentioned.