Will Inflation Worries Be the Excuse to Slow Down the Market Rally?
If the market does start to correct, there should be a greater focus on individual stock picking.
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Excitement and optimism about Donald Trump's election have been driving a furious market rally, but as stocks become increasingly extended and the mood becomes frothy, the danger of corrective action is building.
There was some slowing on Tuesday as money rotated out small-caps and some of the hottest areas and back into Magnificent Seven MAGS and big-cap technology that had been lagging. Bitcoin IBIT stayed hot but is pulling back on Wednesday morning.
The primary justification for this rally has been the Goldilocks economic narrative on steroids. There has been a surge in optimism about economic growth, and although there has been concern about inflation, it has been largely ignored because of the hope that growth will overcome its negative impact.
Bonds have been struggling, and there has been a steady decline in the odds of Fed rate cuts over the next year. Interest rates are now even higher than they were before the Fed cut rates by a half point.
The technical and emotional setup makes the CPI report due out on Wednesday morning at 8.30 a.m. ET even more important than usual. While the market has been ignoring bonds and the reduced odds of a Fed rate cut, will a hot CPI number cause an alarm? With the market so extended at this point, there is a much higher risk of a negative response than usual.
While the odds of a negative reaction are high, it is unlikely that this news alone will be enough to kill this powerful uptrend. Dip buyers and underinvested bulls are likely to provide support, but a period of choppy behavior would not be surprising.
One of the main things I will be watching for is not just movement in the indexes but rotational action under the surface. If there is corrective action, then market players are likely to shift to a greater focus on stock picking. There are still plenty of individual stocks that are good values, and that will offer favorable technical setups if the broader market struggles.
We have some mild selling to start the day.
At the time of publication, Rev Shark was long IBIT.
