pmath

This week's main event, the CPI, was overshadowed by a mid-day government bond issuing gone poorly. The CPI came in a little hotter than expected, but Core was in line at 4.1%. The interesting thing about economics is data manipulation. An old joke is that two economists see a bird in the sky. One shoots a foot to the left, and the other shoots a foot to the right. They both missed but celebrated as, on average, they had two perfect shots. The point is the details of these data releases can become critical when so much depends on them. According to Ophir Gottlieb of Capital Market Laboratories, "shelter inflation is now 70% of total inflation over the past 12 months. When shelter inflation is computed using the private indices (like Zillow and ApartmentList), CPI is now 1.5% over the last year; below Fed target and is 1.1% annualized over the last six months." That's a major discrepancy and a critical one regarding how much is dependent on the inflation data. I think the market recognizes it, and that is why, despite the slightly hotter-than-expected CPI, markets started the day positively. The trigger that caused the market to roll over hard was the bad Government bond auction that indicated higher interest rates. In my view, despite CPI grabbing all the headlines, the market is more concerned about higher rates, which can induce a recession, rather than resurgent inflation. The Russell 2000 is the most representative of stocks impacted by a slowing economy, and it fell off a cliff with a 2.26% drop. Needless to say, net lows continued on both exchanges. So, is it all bad? Well, it could have been better without the poor bond auction, but CPI having less of an impact is a huge step forward. Inflation is the dragon that needs to be slayed. It is the genie that can't be let out of the lamp because it can feed on itself and grow uncontrollably. We need to watch whether bond yields continue to expand, but the main concern definitely seems to be changing. The good news is that climbing yields will result in a dovish FED, partly neutralizing its climb. This doesn't mean a surge in yields can't hurt stocks, but we need to be aware of the change. There is another important part of this development. Whenever the main reason for concern changes, that impacts stock rotations. Under the surface, smart investors begin shifting capital to stocks that will be less affected by the new 'problem.' Take a look at the leading stocks, and you'll notice that all of the biggest losers today were recent winners and are all linked to the economy or commodities. On the other hand, higher growth technology stocks were relatively unscathed, given the Russell 2000 drop. This may change, but this rotation and the new trend must be closely watched as it typically precedes bull markets in growth names. A strong move higher from here could be a great expectation breaker after today's action, and I want to be prepared for it. On the downside, my remaining pullback buys have all been showing outstanding relative action. If markets don't deteriorate much further, I am still happy to do some buying on a pullback in leading names. This will be a day-by-day analysis as we remain with net lows but above our recent follow-through day - an undecided position. The key remains to identify the changing market dynamics, identify leaders, and focus on low-risk setups with controlled overall exposure (maintaining adequate cash positions given conditions). We remain in control, and we know when our plans have failed. We are empowered to act. No fear, just decisive action with objective data. $NTNX $TTD $UBER $META $NVE $LLY