S&P500 Biggest Gain Since 2020, CPI Cause and Effect and Institutional Investors

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After data showed that prices rose slower than forecast, the S&P500 surged by the most in two years and Treasuries rallied. This fueled bets that the Federal Reserve can dial back its aggressive tightening efforts.

The dollar fell after Thursdays US inflation report showed slower growth in prices. This made people think that interest-rate increases would have to be slowed down or even paused.

The CPI is up 7.7% YoY for one of the biggest increases in inflation in US history. Did the market really rally because inflation is slowing down? Maybe. But there’s also something else at play.

Institutional investors drive market action, not retail or amateur traders like you and me. These institutional investors have HFT and algorithmic trading divisions and many times they are the dealers or market makers, providing liquidity to markets.

When too many investors and hedge funds are on the same side of the trade, dealers (sell-side) have trouble keeping liquidity flowing in markets. When these imbalances get large enough, you’ll often see narratives within the MSM that take pressure off of dealers as they flip the market balance and cause a counter trend rally. What ever institutional investors and Wall Street needs to keep the orderly function of our markets, that’s what they get.

What may have happened here is that dealers were feeling the squeeze from low volatility. We can see that pressure in the VIX.

VIX volatility chart on November 10, 2022.

Not since the start of the war with Russia over Ukraine and pandemic lockdowns in 2020 has volatility dropped this low.

Institutional investors needed the market to counter trend to release the pressure on dealers and so on November 10, 2022, the CPI print gave them the narrative they needed for traders to take the opposite side of the trade and relieve some pressure on dealers.

Stocks rally at market open after inflation rose less than expected in October

Stocks rally at market open after inflation rose less than expected in October

SPY Chart

SPY is in a technical downtrend rating. The lower than expected CPI print may give the S&P500 the bullish momentum it needs to run back up to test downtrend channel wall resistance near $415. We will look at SPY in more detail on this week’s Saturday Show.

spy
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