Find out what today’s Consumer Price Index (CPI) number revealed to traders. It’s probably not what you think.

We were all waiting for the CPI number this morning to see if elevated fears of inflation are warranted.

The CPI jumped 0.5% in January, well above market expectations. Expectations were for a 0.3% to 0.4% increase.

What was really enlightening was how the market responded to the CPI report.

CPI report

The market did a 100 point gap-down open but then rose for the rest of the day. Why? Because it’s all about the U.S. dollar.

US dollar

That’s a perfect inverse relationship with the US dollar doing a gap-up open.

We also had the 10-year yield going above 2.8% and yet the market held up fine.

All of this suggests that the reason the market sold off was because of increased volatility and the massive unwinding of the short vol trade.

Knowing exactly why the market sold off over the last few weeks is incredibly important because interest rates rising implies a longer term cyclical Bull/Bear cycle correction, while short vol unwinding implies a short-term market imbalance that just needs to be worked off.

We’re still in the fog of war but a clearer picture is beginning to emerge.

Keep your eyes on the U.S. dollar. Whether the market goes up or down right now appears to be tied to the price of the U.S. dollar.