CPI Can't Save Stock Market Ahead of $7 Trillion Expirations
Stocks closed higher but struggled to hold gains despite lower CPI and strong Micron earnings.
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Lower-than-expected CPI and strong earnings from Micron (MU) gave the bulls an opportunity to turn the market tide, but they were unable to deliver the goods. All of the major indices closed higher, with breadth at 57% positive, but the finish was weak, and closing prices were well below intraday highs. The biggest problem was that trapped bulls used the strength to lighten up rather than chase things higher.
Because of the government shutdown, there were questions about the validity of the CPI numbers, but structural issues are limiting the reaction to economic news.
Part of the problem is that Friday is option expiration, with a record $7 trillion in notional exposure, including $5 trillion related to S&P 500 options, in play. This will trigger pinning action that keeps stocks contained. In addition, the Bank of Japan will be issuing its interest rate policy, which will impact markets around the world. The biggest issue is that, at this time of year, many large funds are making allocation changes and adjusting their portfolios.
The good news is that the lows hit on Wednesday were not tested, and there is some support. Once options and the BOJ are out of the way and institutional investors close their books for the year, it will be easier for the bulls to gain some traction. The traditional Santa Claus rally doesn’t start until after Christmas, and given the recent pressure, the technical setup for a rally at that point will be pretty good.
Another issue making decisive action more difficult is that Bitcoin and other cryptocurrencies remain very weak. There doesn’t seem to be an appetite for speculation in that group, and there is suppressed interest in small-cap speculation as well. There are no big readings of stocks moving up more than 10% in a while, and there is hardly anything that can be considered a "meme" stock right now.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
