The stock market sold off sharply soon after the release of the widely watched inflation reading that came in higher than expected. The CPI jumped to 0.4% in September, up sharply from 0.1% in August, well above street consensus estimates for 0.2%. Core consumer prices (ex-food and energy) rose 0.6% or above the street’s forecasts of 0.4%, remaining unchanged from August.
CPI rose 8.2% year-over-year, down slightly from the previous reading of 8.3%, but the reason for the early morning stock market setback is core CPI climbed 6.6% from 6.3%. Upon digesting the economic numbers, inflation remains hot, and the Fed will likely not pivot from its tight monetary policies.
As can be expected, investors and traders sold off the market. So why the sudden and sharp intraday stock market reversal?
The dramatic intraday reversal may be the confluence of technical and other factors.
(1) Extreme and persistent negative sentiment readings can lead to sudden and explosive oversold rallies. The recent AAII Sentiment Survey shows retail investors are overwhelmingly bearish. The weekly bullish sentiment reading came in at 20.4%. It remains one of the lowest readings in history after the bullish sentiment plummeted to a low of 17.7% on 9/21/22. The bearish sentiment reading (55.9%) also remains near the extreme highs for the year (60.9% - 9/21/22).
(2) Short coverings can lead to a short squeeze. Short interests in SPDR S&P 500 (SPY) recently climbed to a high of 180,520,000 or 2.4 days to cover on 9/27/22 before falling back to 163,720,000 or 2.1 days to cover on 10/12/22.
(3) The 10-year Treasury yield (TNX) soared to a 14-year high of 4.080% soon after the US September core CPI rose 6.6%, the fastest increase in 40 years. However, when the 10-year T-note failed to follow through with its breakout above 3.992% (9/27/22 high), it may have triggered investors to buy stocks.
(4) Optimism ahead of the Q3 bank earnings also sparked an explosive rally in the financial sector. S&P Financial sector (XLF – 31.54) was the best-performing S&P sector today, gaining 1.25-points or 4.13%.
(5) SPX rebounded from the 50% Fibonacci retracement (3,505.24) from Mar 2020 to Jan 2022 rally. The midway point between the pandemic low (2,191.86 -3/2/20) and the all-time high in January (4,818.62 - 1/4/22) has some technical significance as it is the halfway mark and is easy for investors to calculate.
(6) Besides being the 50% retracement level, 3,500 is a psychological number. The ability to hold this level may attract sideline money to return.
(7) Positive divergences may be developing between technical indicators (i.e., MACD, RSI, etc.) and the daily price (SPX), suggesting the potential for a market bottom, at least on a near-to-medium term.
(8) Intraday reversal patterns such as positive outside days (reversal hammers) across numerous stock market indexes (SPX, INDU, NYA, COMPQ, NDX, MID, SML, etc.) and S&P sectors/industries (XLK, XLF, XLV, XLY, BKX, SOX, DRG, etc.) are technically constructive.
Today may have been a critical reversal day. However, the primary trend from the Jan 2022 peak remains down for SPX, and consider oversold bounces until proven otherwise.
Nonetheless, SPX can rally toward 3,707-3,739 (10/7/22 gap-down) and above this 3,807-3,810 (10/5/22 high and the 38.2% retracement from Aug-Oct 2022 decline), 3,860-3,887 (9/6/22 low and the Aug 2022 downtrend), and 3,907-3,944.5 (9/21/22 high, 50% retracement from Aug-Oct 2022 decline, and the 50-day ma).
Formidable intermediate-term resistance remains at 4,007-4,167 (61.8% retracement, 9/13/22 gap-down, 9/12/22 high, and the 200-day ma).