I’m Selling, But I’m Not Bearish, After Wall St. Brushes Off Hot CPI

A hotter-than-expected consumer price index report put some early pressure on the market, pushing breadth down to around 30% positive. Dip buyers showed up quickly, and the Invesco QQQ Trust (QQQ) is now in the green while the iShares Russell 2000 ETF (IWM) lags, down about 0.6%.

The rotation within the chip sector continues. Nvidia (NVDA) is weak again, and that is benefiting the other chip names, with the VanEck Semiconductor ETF (SMH) up about 0.8%. The Roundhill Magnificent Seven ETF (MAGS) is flat.

I’m surprised buyers shrugged off the inflation report so quickly. Core prices rose 0.3% in October for the second straight month, above the 0.2% that was expected. Fed Gov. Christopher Waller added to the pressure by saying he is leaning toward a quarter-point rate hike in December and that a half-point move should be considered if core inflation keeps running around 0.3% a month, which is what October showed. A year ago, a hot consumer price index and a hawkish Fed governor on the same morning would have produced a much uglier day.

Why Rates Aren’t Scaring Investors

The main reason is growth. The economy is strong enough to handle higher rates. The October jobs report was solid, consumer sentiment came in strong on Friday, and corporate earnings are growing at a rapid pace. When the Fed raises rates into a strong economy, it is cooling things off, not choking them. Investors fear rate hikes when growth is fragile, and growth right now isn’t fragile.

The second reason is that the fear of stagflation is receding. For much of the fall, the worry was that the Iran war would keep pushing oil higher while growth slowed, the worst combination for stocks. That fear is fading. Oil has fallen steadily as negotiations with Iran progress, and Brent crude is now well below its recent highs. Higher energy prices were a big part of the inflation problem, so cheaper oil takes some pressure off future inflation reports even if today’s was hot.

The third reason is that a December hike is largely priced in. The market has been expecting it for weeks, so Waller’s comments mostly confirmed what investors already assumed. The open question is whether it will be a quarter point or a half point, and so far the market isn’t worried about the bigger move.

History shows that rising rates and rising stocks can coexist. The Fed raised rates 17 straight times between 2004 and 2006, and the market climbed because earnings kept growing. The counterexample is 1994. The Fed doubled rates, earnings grew strongly and the S&P 500 still went nowhere, because valuations compressed to make room for higher yields.

That is the risk to watch. Strong growth can carry the market through higher rates, but it doesn’t make stocks immune to them. The iShares 20+ Year Treasury Bond ETF (TLT) is lower today, so the bond market is less relaxed than the stock market. If yields keep climbing, they will eventually weigh on valuations, and small caps, which depend more on borrowing, will feel it first. That may be why the IWM is lagging today.

Why I’m a Net Seller

I’ve been a net seller today. That isn’t because I’m bearish. After a strong two-day bounce, I wanted to do some repositioning. I reduced my position in SpaceX (SPCX), which remains a core holding, and took some profits in Xeris Biopharma (XERS), among other things.

Cash levels in client accounts at Hammerhead Financial are high. I’ll be aggressive with new buys when I find stocks I like, but right now my focus is on protecting the gains we’ve made and being ready to act quickly as technical conditions improve.

This is how I’ve been handling a market that lurches. Big bounces are a chance to trim and raise cash at good prices. When the market gives me a pullback that holds and charts that set up properly, I’ll have the cash to take advantage of it. It still doesn’t make sense to chase.

At the time of publication, DePorre was long SPCX, XERS.