There is clearly something magical in seeing an inflation measure carry a negative sign. The U.S. Bureau of Labor Statistics reported inflation data for June, and it included a -0.1% change in the Consumer Price Index (CPI) from May to June.

Source: U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items in U.S. City Average [CPIAUCSL], retrieved from FRED, Federal Reserve Bank of St. Louis, July 11, 2024

The chart above shows that the CPI stayed within a tight range of change between 0% and 0.5% until June’s reading. That pleasurable drop into negative territory for the first time since May, 2020 was enough to cause major shifts in financial markets. Investors quickly rotated out of growth stocks like big cap tech and bought up interest rate sensitive stocks and the “cheap” stuff that has been left for dead.

The iShares Russell 2000 ETF (IWM) soared 3.6% to a 28-month high, a long overdue and bullish breakout.

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The iShares U.S. Home Construction ETF (ITB) surged 6.2%, quickly defied a recent downgrade from Citigroup that seemed poised to send ITB into an eventual bear market, and shook off the blues from a busted spring home selling season.

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The iShares U.S. Real Estate ETF (IYR) gapped up 2.8% and almost finished recovering its losses for the year.

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Even the regional banks came alive. The SPDR S&P Regional Banking ETF (KRE) jumped 4.2% and almost got back to flat for the year.

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The end result of these strong gains and reversals was an abrupt improvement in market breadth. My favorite technical indicator, the percentage of stocks trading above their 50-day moving averages (DMAs), or what I call AT50 for short, climbed an astonishing 13 percentage points. A subtle downtrend came to an abrupt and definitive end.

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This shift continues a string of notable divergences in market breadth. This divergence is a bullish contrast to the notable declines in the S&P 500 (SPY) and the Nasdaq (COMPQ) on the day, 0.9% and 2.0% respectively. Both major indices suddenly look toppy again. Once again, they printed what technical traders call bearish engulfing patterns, sometimes called major reversals. Only the surge in market breadth stops me from getting bearish (I remain neutral on the stock market per the last label in the S&P 500 chart below).

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Now all the market needs is an actual rate cut from the Fed to give the celebration in market breadth some lasting power. As I noted when making the case to buy into the iShares MSCI BRazil ETF (EWZ), the market has recently sniffed out an imminent launch of a rate cutting cycle from the Federal Reserve. July 11th is the day the market practically forced the Fed’s hand. The odds of a rate cut for September jumped from 69.7% to 86.4%. The odds for staying right where they are dropped a lot closer to zero.

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Source: CME FedWatch Tool
 

Now Back to the Inflation Story

While the celebrating over a negative handle on the headline CPI was market-moving, the headline CPI just continued an easily recognizable trajectory. Core CPI increased from the previous month and was up 3.3% year-over-year; both increases were lower than the previous month. The trend continues downward. Thus there was really no new news in the data. The trend is down, the trend is still the friend of the consumer.

U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items Less Food and Energy in U.S. City Average [CPILFESL], retrieved from FRED, Federal Reserve Bank of St. Louis, July 11, 2024.

I earlier complained in “Fed’s Powell Avoids the Obvious: Inflation and Interest Rate Forecasts Make Little Sense” that Powell’s insistence that the Fed would cut once was inconsistent with a forecast indicating no progress on inflation. The core CPI continues to suggest that (overall) inflation’s days are dead for now.
 

Epilogue: TLT

The soft inflation numbers naturally drove bond yields down. The iShares 20+ Year Treasury Bond ETF (TLT) jumped 1.0% after fading from its highs of the day (TLT moves opposite the direction of yields). I used this opportunity to buy a fresh tranche of put options. I like fading TLT because the crushing levels of debt issuance periodically force yields higher and send TLT lower. Moreover, the economy is still able to generate enough inflation scares to send bond yields higher. Having said that, I have shifted the trade from a downtrend channel (shown in blue below) to a horizontal trading range (shown in black below). The first trade off this new presume range worked well as I took profits right at the top of the previous downtrend channel.

Of course a rate cut from the Fed could alter this trade all over again.

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Be careful out there!

More By This Author:

Fed’s Powell Avoids The Obvious: Inflation And Interest Rate Forecasts Make Little Sense
An Early Trigger On The 20% Rule For Buying EWZ
Fed’s Powell Avoids Rate Cut Talk While April CPI Keeps Hope Alive