What Now?

What Now?

Last week had a lot of data, but stock markets didn’t really move? Was the data meaningless? I don’t think so.

To quickly hit the big highlights, CPI went up to 3.7% Y/Y from 3% two months ago. That was the biggest monthly gain in over a year, which will help inflation stay sticky. Worker earnings are also continuing up at a decent clip, helping inflation persist. PPI (Producer Price Index) has been more sedate than CPI, but this month surprised with 0.7% m/m vs. expectations of 0.4%.

Retail sales were also stronger than expected, at 0.6% vs. expectations of 0.1%. A lot of that was from spending at gas stations but Core Sales were also up more than expected. Lastly, Industrial Production was stronger than expected, at 0.5% vs. expectations of 0.1%.

In short, inflation and the economy are running hot, so we should expect interest rates to remain higher for longer. Nonetheless, markets were only down a bit on the week, so maybe I’m making too much of this?

I always mention options expirations (OpEx,) because they often provide opportunities for shifts in market direction. Particularly important are the quarterly expirations that take place in March, June, September, and December. We just had the September expiration on Friday. That helps peg indexes at popular levels, but once it’s gone, the index can reset.

Think it doesn’t matter? Look at March 2000:

Or June 2008:

It can also lead to higher prices, like March 2009:

I admit the correlation can be messy, but big moves often surround quarterly OpEx or the approach into it. Could we have something similar happen, here? I certainly wouldn’t guarantee it, but the market doesn’t seem well positioned for trouble, with VIX near lows but jumpy, and a fair amount going on.

What’s going on? We have the UAW strike, a potential government shutdown, inflation jumping up, an FOMC meeting, the restart of student loans, and market performance concentrated in just a few names. I could cite more, but those seem like the highlights.

What to do? For now, we have weak seasonality for a few weeks and a market that’s looking a little tired. It looks like a market that has the potential to sink rapidly. That certainly doesn’t mean it has to, just that it might. I could, and did, say the same thing in May and June and nothing much happened. We could easily see the same thing here.

More precisely, we saw small declines around those OpEx events that were rapidly bought. Maybe we get that, or maybe we get more. I’ll be watching the volatility complex for clues and try to respond appropriately.

If that sounds a bit grim, there is an upside. Particularly if you assume the market holds up OK, as we move into October, we should get a good buying opportunity. Or, stocks crash and that’s a buying opportunity. Either way, as we move into October, chances are we should see a better opportunity for buying stocks.

For the short-term, it usually takes a couple of days for the dust to settle after a big OpEx. I’d like to think by the middle of the week we’ll have a better sense of where we stand. Was Friday the start of something more significant or is this just another modest bump in the road. We’ll see.