CPI Has The Deciding Vote
Markets we’re of course closed today, but the four day week upcoming will be anything but quiet.
The S&P closed up 0.37% from last Monday’s open to Friday’s close.
Buyers prevented a lower high under 767.5 into the Thursday open and price gently pulled back off of the trend line for more of a digestion day on Friday than anything else.
As we’ll see, headed into this week its worth keeping an open mind to both directions after the sellers failure to go lower on Thursday, but also the supporting evidence still leaning neutral at best.
Good News Is Bad Again
The economy added 162k jobs in August, nearly 3x the consensus estimate of 55k. Prior month numbers were revised from negative 23k to positive 21k. Wage growth came in at 0.3% month over month and 3.1% year over year. The unemployment rate held steady at 4.1%.
The strength of this report was basically enough to confirm that the labor market is strong enough for the Fed to focus on the inflation side of the dual mandate.
Fed odds shifted from 52.4% chance of a hike pre labor report to 59.4% chance of a hike post labor report with a secondary hike being pushed up from March 2027 to January 2027.
This makes Friday’s CPI report the deciding factor. Headline inflation is expected to come in at 0.4% month over month while core is expected more so in line at 0.2% month over month. Year over year, markets are expecting an unchanged 3.4% headline number and a slight decrease from 2.5% to 2.4% on core.
However it seems to me that core could honestly come in unchanged as a miss, or heck, even on the hot side near 2.6%. Just take a look at ISM Services PMI.
The ISM Services Prices index jumped to 72.6 in August, and strong demand, not supply shortages appear to be the driver. Notice that Supplier Deliveries fell over the same period. Because services make up most of the weight in the CPI basket it wouldn’t surprise me to see CPI come in hotter than expectations.
Notice in the line chart above PMI prices usually lead inflation by a few months…well its catch up time.
Hot CPI should cause rate expectations to jump and thus put downward pressure on risk assets at least temporarily. Kevin Warsh would be forced to hike, especially in the context of his Jackson Hole speech, and basically play catch up to the two year yield.
Note in the image above the Fed Funds (black) rate typically lags the two year (blue).
Though I’m not going to write a full segment on it, the exchange of strikes in the Middle East also pressured /CL futures higher on Monday… another inflationary pressure.
The Best Numbers Didn’t Win
Broadcom reported 221% AI semiconductor growth. The stock gapped down.
Dell reported 58% AI server revenue growth and a $95B backlog. The stock opened in range.
Snowflake reported 37% product revenue growth. The stock gapped up… big time.
This isn’t to say the market is getting it wrong, but it is to say that expectations have almost everything to do with how a stock moves.
Broadcom earnings were great, but people already know AI hardware demand is massive. Dell earnings were great, but everyone already knows they fall into that same hardware narrative.
Snowflake had the opposite setup. Expectations were low, software has been in the dumps on fears of AI commoditization. So when results show AI is actually causing an increase in the consumption of the product that was a positive surprise.
It doesn’t mean that software is going to grow faster than hardware, but it does point to the sustained expectation imbalance between the ‘two sides of the AI trade coin.’
Memory Wakes Back Up
Speaking of hardware… Memory did wake back up on Friday. It feels irresponsible to not mention it.
Micron, Sandisk, SK Hynix are all breaking out from really tight daily charts.
I’m less inclined to put too much of a fundamental hat on here and suggest that these stocks cant go higher because expectations have already topped. Think Microns news failure on earnings which literally marked the all time high…
My mental framework here is that if the AI trade is going to keep playing out, memory plays a key role in that. Regardless of expectations. Just listen to how Jensen and Elon talk about this constraint.
I want to at least try to own these stocks at tight risk spots noting how they’ve moved in the past. These names are extremely liquid and have high ATRs. If I can find a tight risk intraday spot to get on board, I’ll do my best to keep some in the swing account. Granted this is against a responsible intraday stop. Whats the worst that happens, get stopped out for 1R a few times on trade that have the potential to go +10R if they stick and get nutty?
Micron had a 41% haircut from highs. Sandisk had a 57% haircut from highs. SK Hynix had a 58% haircut from highs. Perhaps expectations of “cheap” and “expensive” have been reset?
This is how I’m thinking of it. You’ve got to do what’s right for your account and investor profile.
As always the charts will light the way. Lets see if the broad market compliments this.
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Broad Market Analysis
SPY – Monthly
August produced a solid green candle with some selling pressure near the highs, but SPY still closed in the upper third of the monthly range, well above its opening print and above the prior breakout level. The bar produced a clean higher low and higher high, with a close over the breakout level. The broader monthly trend remains firmly pointed upward above a rising 20-month SMA.
There is still plenty of room for SPY to establish a monthly higher low near the previous all-time high around $700 without damaging the larger trend. If the multiple inside-bar breakout continues, the measured move remains approximately $850.
SPY – Weekly
The weekly candle formed a green hammer after briefly breaking the prior week’s low. Sellers had the opportunity to generate followthrough and failed, allowing buyers to reclaim the opening print and close near the top of the weekly range. That failure is more constructive than the candle would be in isolation.
SPY remains above the rising 10-week moving average, the breakout anchored VWAPs, and the previous all-time high near $760. This is still a weekly bull flag unless proven otherwise. The larger line in the sand remains $754.75, but buyers should not want to revisit it after being handed this failed breakdown.
SPY – Daily
The daily chart improved significantly when SPY gapped back above the 8 EMA and reclaimed $767.50, the lower boundary of the previous flag. Friday then printed an inside resting candle rather than aggressive downside continuation. That has neutralized the daily downtrend and created an opportunity for a higher low followed by another push toward the highs.
The weekly expected move spans $760.65 to $779.73. Holding above $767.50 keeps bull flag consolidation and continuation in play. Sustained trade below that level would put the weekly structure under pressure and reopen a path toward the daily 50 SMA and $754.75.
SPY – Hourly
The hourly inverted head and shoulders triggered higher through Thursday’s gap. The ideal outcome is now an hourly higher low and daily higher low around the gap-fill zone, where the daily 5 SMA, 8 EMA, 20 SMA, Fibonacci retracement, and anchored VWAPs converge between approximately $766.40 and $767.50.
If SPY first breaks above $774.85, Friday’s low becomes the relevant higher-low reference. A return beneath the gap followed by a failed reclaim of $767.50 would recreate a lower high and materially weaken the bullish case. For now, the Thursday failure to sell off leaves The Gift™ with buyers.
Market Internals – NYSE
NYSE volume flows improved Thursday, but they did not exceed Wednesday’s levels or reach the more meaningful 300 million area. Friday’s selling also produced less outside volume than Thursday generated to the upside, while the AD line recovered nicely into the end of the week.
The weak cumulative build is the main concern. Thursday’s rebound was powered primarily by the Mag7 rather than broad participation across the exchange. Sellers failed, but the internals do not yet support blindly assuming a new ATH is incoming.
Market Profile – /ES
Thursday produced a clear double-distribution profile separated by D-period single prints. Friday accepted value almost entirely within the lower distribution and left a poor low, meaning buyers who chased Thursday’s highs are not in a particularly strong position.
The constructive scenario would be a pullback toward the gap-fill area, value building near the lower end of the profile, and a subsequent look below and fail. If value instead collapses beneath $767.50 and begins overlapping lower, the daily chart returns to neutral and the failed breakdown thesis loses credibility.
MAGS – Magnificent Seven ETF
A sharp break higher Thursday now needs a higher low above its moving averages, with Amazon and Google particularly important to that sticking.
QQQ – Impact on S&P
Monthly and weekly structures remain constructive, but the NASDAQ has not yet made another all-time high attempt.
The daily chart has improved above the 50 SMA, but QQQ remains trapped inside the Junk Drawer™. If price remains constructive near the upper 50% of the range with holds over 713.5 – 712.5 that improves the odds of the gap being tested above. If price fails that zone and loses the 50 SMA again… not a great look.
The S&P can continue leaning on its heavyweight components, but a durable move toward new highs probably requires QQQ to escape this range, with memory, semiconductors, Magnificent Seven stocks, and financials participating together.
If you want the full take, including all of the nuance of breadth, risk appetite and much, much more, check out the weekend episode here:
Economic & Earnings Calendar
Top watches: ORCL, ADBE, RH
Swing Stock Scans
There are actually quite a few more interesting names than what we have below. These are just the two that seem to have actionable closes as of Friday.
Leading high beta names are still: MU, SNDK, SKHY, INTC, AMD, MRVL, ARM, DELL, HPE, NBIS, LITE, BE.
QCOM – Daily / Weekly Chart
Starting to tighten right under the 50 SMA after setting a weekly higher low.
TMO – Monthly / Weekly Chart
Really long base setup here with weekly hammer on a gentle pullback after a great rally from lows. Just having this on radar if it ever decides to breakout.