Indices 2/10, page-286

Are the lows in for a Santa Rally?

Let's Discuss...

We had a very bullish broad-based rally across all sectors on Friday. The whole market trading like a biotech stock that just got FDA approval



This rally was on the back of everything and a very strong jobs report, the US economy added 336,000 jobs but the unemployment rate stayed steady at 3.8%



so why did we rally on the back of strong numbers?

two reasons: a technical rebound and the fundamental picture

US indices as a whole were oversold:

• 90%+ of stocks below 50DMA
• VIX = 20
• S&P500 at 200 SMA
• Big tech testing support
• DXY down

The fundamental picture:

• Low unemployment
• Low inflation

These are the mandate targets for the FED: full employment and stable prices. If the FED can manage to get inflation lower while keeping the labour market and the economy roaring, they would have nailed the proverbial "soft landing."

That being said, this entire rally will come down to next week's inflation numbers.

The consensus forecast among economists is that the CPI will increase by 0.3% in September, down from 0.6% in August. This would bring the annual inflation rate to 3.6%, down from 3.7% in August.

The Fed's goal right now is to hit the bullseye, and if they can do that without touching the hard landing quadrant, they've achieved a "soft landing."

A 3.6% CPI print or lower means that rate cuts are probably closer than expected, rate hikes are completely done, and a mild recession is unlikely, while much of the drawdown in the market since August was the market pricing in at least one more rate cut and a weakening economy and consumer sentiment.

Yesterday's rally was also on huge options volume, and I believe a lot of it had to do with tech put sellers being squeezed, and call buyers participating too.



Look at these call volumes above the bid on the SPY right before we took off
- They swept all Lottos on $SPY as VIX broke 18




So, to answer my questions, are the lows in?

That depends on the CPI print this week. If it comes in as expected or better, a year-end rally might come to pass.

If the CPI print is worse, expect further selling in mid-caps and small-caps and more volatility in large-cap names.



Big tech is dominating, and why shouldn't they?

Huge amounts of free cash flow, excellent balance sheets, a huge installed base, globalized revenue streams, and so much pricing power.

But there are huge amounts of value in small-mid-cap names, and if the data goes the way we expect it to, I think we'll see the broadening we've all been looking for towards the end of this year to support the bull case

Finally, TLT (20-year Treasury ETF) is being bought like hotcakes on sale at a hotcake convention. The market is pricing in that the ceiling for rates is near or completely in and it shows that the market is now opening up to duration risk as the curve continues to steepen and evenutally uninverts

- Chase