The Hot CPI Report May Be the Medicine the Market Needed
A warm inflation number lets the market price in the worst case for the Fed, and biotech is already acting like it has washed out. Here’s my plan.
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The September consumer price index came in mixed. The headline number rose 0.6% for the month, matching expectations, but core inflation, which excludes food and energy, increased 0.3% against a forecast of 0.2%. That is warm enough to keep the Fed on track for another hike and to undercut the hopes for a softer Fed that New York Fed President John Williams raised on Tuesday.
This morning I wrote that a hot number would probably help the Magnificent Seven and hurt the rest of the market, and that is how the day started. Apple (AAPL) and Alphabet (GOOGL) jumped, and Microsoft (MSFT) and Amazon (AMZN) tried to hold. Breadth opened at about 25% positive, and 400 stocks hit new lows right out of the gate.
Then the market got worse. A brief bounce faded, breadth slipped to about 23%, and the mega-caps rolled over hard. Only Apple is still green.
Pricing In the Worst Case
A hot core number ends the debate for now. The odds of a rate hike at the Fed’s October 28 meeting more than doubled to 47% from 22% after the report.
The market can stop hoping for a softer Fed and price in the worst case: more hikes and rates staying higher for longer. That is painful today, but once the worst case is priced in, there is no bad news left to sell on.
Progressing Toward a Washout
On Monday I wrote that bad markets don’t scare you out, they wear you out, and that the strength in the indexes has prevented capitulation. Today the safe haven stopped working. When even the mega-caps give way, there is nowhere left to hide, and that is what a washout looks like.
I don’t expect an immediate turn. Washouts take time, and this one may need a few more ugly days to run its course. But this report moves us further along, and that is why it may be the medicine the market needed.
Biotech Is Already Acting Better
The most encouraging action Wednesday is in biotechnology. The iShares Biotechnology ETF (IBB) is up about 1.3% while the rest of the market is getting crushed.
The group was hit early and hard by hedge-fund degrossing, so it went through its washout first. Now it is holding up on a day when nearly everything else is falling. That is what bottoming action looks like, and when a group shows strength while the market is weak, it is often an early sign of where the next leadership will come from.
Game Plan
That relative strength is why I made a few small buys in BridgeBio Pharma (BBIO), Abivax (ABVX), Butterfly Network (BFLY), Precigen (PGEN) and Tempus AI (TEM). These are partial positions, and I’m keeping plenty of capacity in reserve.
What I want to see next is biotech holding its gains into the close and the rest of the secondary stocks reaching their own washout and starting to hold. That would be the first real sign that the gap between the two tiers is ready to close.
At the time of publication, Rev Shark was long BBIO, ABVX, BFLY, PGEN and TEM.
