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U.S. stocks closed sharply higher on Friday, 12th August 2022, after the University of Michigan’s preliminary sentiment index rose to 55.1 from 51.5 in July. Also in the report was the consumer price expectations which was 3% higher over the next 5 to 10 years and 5% over the next year, lower than last’s month’s 5.2%. 

The rally which started from Wednesday, after CPI data showed inflation cooling from 9.1% to 8.5% from a year earlier, sent stocks higher for the fourth week in a row. 

Investors took the lower-than-expected CPI data to mean that the Federal Reserve will not need to hike rates more than 50 basis points in the next meeting. 

The bond market however had a different view with the 2s 10s spread deeply inverted at negative 41 basis points. 

The S&P 500 and Nasdaq gained for the fourth week in a row, up 3.2% and 3.1% respectively, while the Dow jumped 2.9% for the week. 

Here are the closing levels on Friday, 12th August 2022:- 

 Last Change %Change 
Dow Jones 33,761.05 +424.38. +1.27% 
S&P 500 4,280.15 +72.88. +1.73% 
Nasdaq Comp 13,047.19. +267.28. +2.09% 
U.S. 10Y 2.83%   
VIX 19.53 -0.81 -3.32% 

Friday’s rally has left us with some food for thought. The VIX is below 20. It has fallen 8 weeks in a row, the longest losing streak since 2019. The VIX is also known as the fear gauge. 

The S&P has recouped more than 50% of the losses from the January peak to June low. 

The Nasdaq 100 is more than 20% higher from the lows in June, which technically puts it in a bull market phase. 

However, the RSI (relative strength index) is above 70, which usually means that the market is reaching overbought levels. 

It seems that we have witnessed a massive short squeeze these last few weeks and the retail army is back. The buy the dip strategy has worked well so far and people are going to stick with it. 

Will it be all blue skies from here? It’s hard to be over confident as the market can be unpredictable.  

You have to wonder what the Fed is thinking. It was supposed to drain liquidity from the system by raising rates, so as to lower inflation. But with the rally, liquidity is back in the markets. This could work against the market as the higher it goes, so could inflation and that could mean bigger Fed rate hikes to come. 

While the market is happy to be long right now, it may get some kind of pullback so be ready for that. 

Source: CBOE, Bloomberg 

This commentary is written by James Gomes 
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years. 

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