U.S. Stocks closed lower on Friday, 15^th October 2022 after a University of Michigan survey confirmed the stubborn nature of inflation. 

A day after what will go down in the record books as one of the biggest turn around in prices, the market came to its senses and restabilized its downward path. 

On Thursday, U.S. consumer prices rose 0.4% in September compared to August, higher than projected by analysts with core inflation rising to 40 year high. The data are the latest sign inflation is becoming more ingrained in the U.S. economy, despite numerous Federal Reserve actions to counter the trend.  

U.S. stocks initially plummeted on the report, which exacerbated recession worries on the increased odds of more aggressive Fed interest rate increases. But later rebounded to close sharply higher. 

There was some really interesting price action despite the red-hot CPI print driven by technical factors and positioning. After dropping close to 2% post the CPI print, S&P 500 ended 2.6% higher. Nasdaq ended with a gain of 2.2%.  

The move was apparently driven by algorithmic trading programs which started buying after the S&P 500 completed a 50% retracement of the rally from peak COVID lows.  

Talk about the unwinding of hedges (selling puts) around that same support level mixed with short covering may have added to the cause. Even the bond market saw a reversal albeit not as much as stocks. This article goes into a little more detail. 

The S&P 500 closed near lows of the day, falling more than 2%. The growth-sensitive Nasdaq 100 posted the steepest losses, dropping just over 3% as Treasury yields climbed, with the two-year rate rising back to 4.5%.  

Here are the closing levels on Friday, 15^th October 2022: 

	Last	Change	%Change
Dow Jones	29,634.83.	-403.89.	-1.34%
S&P 500	3,583.07	-86.84.	-2.37%
Nasdaq Comp	10,321.39.	-327.76.	-3.08%
US 10Y	4.02%
VIX	32.02	+0.25	+0.08%

If you listen carefully, you will hear the bears once again saying, “thank you for giving me better levels to go short!”. 

We all know that markets are unpredictable, and what came after the CPI print low must have been a real head-scratcher. Bears got trampled, bulls got FOMO and happy days are here again…. Not quite. 

As Friday’s price action showed, it is now looking like a head fake, a dead cat bounce, or any other name you would like to call it. 

Once the dust settled and investors started to reflect, the underlying cause of the downtrend, which is high inflation, which forces the Fed’s hand, started to come in play again.   

Oversold positions will tend always to have rebounds of some sort and we should continue to prepare for that.  

One other observation was whenever there is a headline about a U.K. pivot the U.S. stock market indices tend to rally. It could be the nature of markets being interconnected, but surely, the U.K. problems are not U.S. problems… at least for now. Selling on those news tends to be good for bears. 

Expect to see more volatility in the coming days but bear in mind, pardon the punt, the core trend is down and it may be a while before it reverses permanently. 

Source: CBOE, Bloomberg