Stay Long – Hot CPI Not An Issue – Asset Managers Will Buy This Dip
POSTED BY PETE STOLCERS ON FEBRUARY 14
Yesterday the market tested the 100-day moving average and it bounced. Stocks closed on the high the day and buyers are engaged. This morning the CPI came in a little hot and we will test the 100-day moving average again. The price action today will help us gauge the strength of the bid.
Prices rose .5% and that is a little hotter than the .4% that was expected. Core inflation rose .3% and .2% was expected. The Fed has stated that they will not accelerate tightening just because their 2% target was hit. Fear of higher interest rates has been keeping pressure on the market. It is important to keep this in perspective. Interest rates are still near historic lows and they have a long way to go before they impede economic growth.
Earnings have been excellent and guidance is fantastic. Stocks are trading at a forward P/E of 16.5 which I do not consider to be extreme. Profits are expected to grow 17% this year on the S&P 500.
The debt ceiling and the budget have been extended. This dark cloud will not loom over the market.
From a technical perspective we have seen the capitulation low. We can expect nervous trading for a few days and a strong rally once support is confirmed.
I believe this decline was prompted by program trading. Bullish speculators needed to be flushed out and there was some asset rotation into bonds. However, the drop was extreme and I still feel the macro backdrop is very bullish.
Swing traders should remain long. We bought when the SPY dropped to its 200-day moving average. We will use a close below that level as our stop. This is a very wide stop and we will let the market chop around. When the SPY spends a week above the 100-day MA, we will raise our stop to that level. Be prepared for a few aftershocks. I would like to see an early low today and a nice rally the rest of the day. The 40 point drop after the CPI is a sign of nervousness. Buyers have an appetite for stocks and we will see this dip reverse quickly today.
Day traders should let the market come in. Wait for support and look for opportunities to buy. Focus on stocks that have good relative strength on the open. They will be poised to move higher once the market finds support.
The CPI has not been a number that anyone has watched in the last decade. It does not drive the market. Rising wages are the largest driver of inflation. Rising wages and rising prices are fine. When it comes to CPI the most important component is oil and it has been declining.
The low that we saw last Friday was a fantastic buying opportunity. Stay long.
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