Market Slice: Much Ado About Nothing?


CPI Numbers: Much ado about nothing?

Two months ago while observing the “leg up” rally that started in late June, we wrote:

… our contrarian nature inclines us to believe that, barring an unexpected “black swan,” the next leg down is not immanent. With the Fear and Greed Index still in “Extreme Fear,” we tend to expect the short-term direction is, if not up, at least sideways.

Since then, the market has gone up and come back down. The vertical line on the chart below shows the date we published that opinion, as the S&P 500 closed that day at 3901. Today, it closed at 3932.


Chart courtesy of

While this rally was longer than a typical bear market correction, our strategic thesis is that we remain in this state until the underlying economic contradictions are unresolved.

Let’s look one more time at this chart, comparing the 2008 market crash with where we are so far in 2022:

Chart courtesy of


Correlation is not proof with CPI numbers and there’s no specific reason to expect this Fall will see the same kind of market collapse that happened as the Global Financial Crisis unfolded in late 2008. However, there are several potential landmines that could trigger another major down leg.

Tuesday’s CPI numbers crushed the irrational hopes for a Fed reversal that seemed to buoy the market over the past several trading sessions. Despite repeated adamant statements that they are now committed to combatting inflation at all costs, the market held to the idea that the Fed would reverse course at the first sign of economic weakness.

With September’s year-over-year inflation coming in hotter than expected at 8.3%, the market had its worst day in over two years as it erased almost all the gains of the previous four face-ripping rally days. From inflation to global tensions to debt concerns, we have spoken repeatedly about the issues that continue to work against any degree of economic stability. This is why the short side of the equities markets remains the best asymmetrical trade opportunity in the markets.

Nonetheless, we sit today significantly above where we were two months ago. Zooming out to view the year-to-date, notice the channel lines at 4200 and 3900:

Chart courtesy of

During the early part of the bear market, the Index tested support at 4200 before bouncing to 4625. This is less than 5% off the all-time highs. The 4600 level failed to hold, and by late April 4200 was breached to the downside. The market continued down to test 3900 in May, then rebounded to test 4200 again as resistance. That level was unsustainable, and prices responded by crashing below 3900 before bouncing back. From July 19 to August 16, we saw the most recent rally take prices back above 4200 again. Bulls hoped this signaled an end to the bear market but those hopes were dashed when prices broke down again, retreating once more to test the 3900 support level.

All this up and down, and the market really hasn’t gone anywhere, as it is what we call “the vicious chop.” Traders who fail to identify asymmetrical opportunities within this sideways market have gotten chewed up by violent price moves and sudden reversals.

It remains to be seen whether the market will bounce back from Tuesday’s selloff or break through 3900 to test the June lows. If Tuesday’s response to the CPI print proves to be an overreaction, we could stay in the channel and even see another run at 4200. On the other hand, any new “bad news” is unlikely to be received with equanimity by the market like we have seen over the past couple months. The markets are almost certain to remain on edge, and the next unexpected development might turn out to be the straw that breaks the camel’s back.

Image courtesy of


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