1. Moving the markets

Only one thing mattered today, and that was the CPI reading, which came in much more “friendly” than expected. The index rose only 0.4% for the month and 7.7% YoY, its lowest annual increase since January. Expectations were 0.6% and 7.9% respectively. Even the core numbers were better than anticipated.

The market reaction was extremely bullish with the Dow jumping immediately some 800 points and headed higher from there with all major indexes following suit. All activity was supported by the 3^rd biggest short squeeze ever.

ZeroHedge summed up today’s 5 Fed speakers like this:

So, all 5 Fed speakers confirmed higher rates from here, 3 signaled somewhat less hawkishly, 1 signaled a slight fear of overtightening, and 1 was full-hawktard.

Bond yields dumped with the 10-year getting crushed, down an incredible 31 basis points to close the session at 3.823%.

As a result, the US Dollar plunged causing gold to have a good day with a +2.67% gain. The S&P 500 jumped over 5%, which was its biggest rally in two years. Whether this “light” inflation report will remain the same in the future is questionable, but for right now those traders believing in the idea that we have seen peak inflation and peak Fed (rate hikes) are enjoying their day in the spotlight.

This broad Ramp-A-Thon has pushed our main directional indicator slightly above its long-term trend line by a tiny +0.93% (section 3), its first peek above it since July. That event lasted only one week, before the bears took over and pushed the index to new yearly lows.

As a result, I like to see a few days of staying power above the line before officially issuing a new “Buy” signal for domestic equity funds. Being a little more selective about the entry point has helped us avoid whipsaw signals in the past.

Updating the historical analog, we find ourselves in this eerily similar spot.

1. Moving the markets

As far as the markets are concerned, uncertainty is the worst of any outcome, a theory which proved to be the correct today, as the results of the midterm elections provided no clear answers as to who would control Congress or the Senate.

Traders had assumed the Republicans being able to easily score most of the House seats, which had formed the basis for the 3-day rally. The idea was that any future spending and tax plans would consequently be blocked.

That did not happen, so the markets tanked across the board and, in the process, wiped out just about all recent gains, which pulled the S&P 500 back down to last Wednesday’s level.

Another extremely negative market influence were liquidity troubles for the crypto exchange FTX (it faces a federal probe), and it appeared that a potential takeover by Binance would not go through, causing some bond yields to retreat sharply as the flight to safety was on. The 10-year yield dropped almost 13bps to close at 4.083%.

The US Dollar rebounded, while gold held on to most of yesterday’s gains.

The CPI is on deck tomorrow and may give the bulls some hope, if the number comes in below expectations.

1. Moving the markets

A bucking bronco type of market behavior seemed to be perfectly complementing this election day with its own ups and downs, irregularities, and accusations.

The major indexes stormed out of the gate and ripped higher with the Dow at one point sporting a 500-point gain, which collapsed, as the index almost broke below its unchanged line. However, bullish momentum reappeared, and all the majors managed to score a green close.

The initial ramp was based on traders’ hopes that in case the Republicans take back the House, a gridlock in Washington would be the result, a scenario which is viewed as a positive because, with a divided Congress and President, government spending, new taxes and regulations will be limited. At least, that’s the theory.

The US Dollar plunged to 7-week lows and, as ZeroHedge pointed out, is its biggest 3-day dive since March 2020. As one analyst noted, “it’s been the dollar’s demise that has been driving this bounce in stocks…”

The beneficiary was gold, as the precious metal spiked +2.13% to over $1,700, which represents a 5-week high. Also giving an assist to stocks were declining bond yields, as market expectations for Fed rate trajectories changed from hawkish to dovish today.

Should market election probabilities not be met, we will see this bear market rally hit the skids, which it may do anyway, should Thursday’s CPI report confirm that we have not yet hit peak inflation.

1. Moving the markets

The markets shrugged off a supply warning from Apple and extended Friday’s bounce into a week that could present unexpected surprises. The obvious one is tomorrow’s mid-term elections, the outcome of which could very well affect the direction of future spending as well as create a political gridlock.

Any kind of stalemate is viewed as a positive for equities, as no new spending plans would be a good outcome for interest rates. However, Thursday’s CPI report, if it comes in higher than expected, will dash any hopes for the bulls and those betting on a Powell “pause” or “pivot,” with a sell-off being a likely possibility.

Today’s markets started with a sideways meandering of the indexes, which ZeroHedge described like this:

Markets oscillated quietly ahead of the midterms, then at around 1345ET – with absolutely no headline catalyst – a wave of buying suddenly hit every US index, lifting everything comfortably green on the day…

Makes you wonder if the Plunge Protection Team (PPT) had anything got do with it in order to create a positive background, since all other assets dropped on the day. If so, that action was perfectly in sync with an aggressive short squeeze.

Bond yields rallied mid-day, as the 10-year solidified its position above the much-fought over 4% level by closing at 4.22%, which was up by almost 10bps. The US Dollar slumped again, but gold was not able to take advantage of it, and the precious metals went sideways.