The Inflation News Is Good, but Not That Good
Poor positioning is helping the bulls more than the news flow.
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I am surprised by the market strength on Thursday. The action was driven primarily by the flat PPI report and lower oil, which helped bonds and took some pressure off interest rates. The Magnificent Seven rebounded 1.2% after lagging Wednesday and the chips performed well. Small caps finished positive but the pockets of momentum have cooled.
The odds of the Fed staying on hold through year end have improved again, though that is far from a sure thing.
Data Does Not Justify the Move
What bothers me is that the news flow does not seem to warrant this kind of action but buyers are still pushing.
CPI came in exactly as expected. PPI came in flat against an expectation of a small increase. Neither of those updates constitutes bad news, but neither count as good news either. They are the absence of a problem rather than the presence of a positive, and the market is treating them like a catalyst.
That tells me that some of this move is being driven by skepticism and poor positioning rather than by the reports themselves. Too many traders, and that includes me, spent the past two weeks anticipating a seasonal top, and the market has refused to give them one. Every session that goes by without the rollover they expected makes their position more uncomfortable, and eventually they have to do something about it.
That is how a market traps people. Not with dramatic news, but by grinding steadily against a consensus that thought was pretty obvious from the calendar and the technical setup.
We get more data on Friday morning with July retail sales and the preliminary University of Michigan consumer sentiment reading. Retail sales carry some weight after a jobs report showing payrolls declined. The market has been treating weak data as good news because it removes the rate hike, but there is a level below which weakness becomes a problem rather than helpful. Consumers pulling back on top of a labor market losing jobs is a different story than inflationary pressures dropping.
What Would Change My Mind
The bond market cooperating is the development that carries the most weight. Bonds were higher on Thursday but reversed intraday and closed near the lows which suggests that bonds aren’t nearly as optimistic about inflation as equities are.
My positioning has not changed. Cash is high, I am highly selective about new entries, and I am working to keep accounts near their highs rather than pressing for more.
Being surprised by strength is not a reason to chase it. The names on my list have not gotten cheaper this week and the ones that reported well are still developing the consolidations I want to buy into. The setups I am waiting for arrive when a market rests, and this one has not rested yet.
If I am wrong and this keeps running, I will have missed some upside while protecting a good run. That is a trade I am willing to make in the middle of August with the catalyst calendar going empty and two more data points hitting before the weekend.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
