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In the past 15 weeks, the S&P500 and, by extension, the SPY has only had one red candle, with yesterday’s price action potentially posting the second if the index & ETF continue to correct. The cause was the CPI, which came in slightly higher than expected and put paid to the FED cutting rates in March or maybe at all this year. The market’s confidence in rate cuts flew in the face of Jay Powell’s assertions that a March cut was ‘unlikely,’ and until yesterday, we could say the market pretty much ignored what he’s been saying.

As I’ve mentioned before, the Consumer Price Index (CPI) is not the Federal Reserve’s (Fed) preferred inflation metric; that honor belongs to the Personal Consumption Expenditures (PCE). However, there are concerns that inflation may be more persistent than expected or desired, even when using the PCE. The latest PCE data is due at the end of this month, and if it shows an increase, it could be a serious issue for not only the FED but also for the US Treasury and Administration, especially as it is an election year.

From a market cycle perspective, history shows that markets tend to perform well in an election year, especially after a solid January. In other words, if the S&P500 performs well in January, it usually bodes well for the rest of the year. However, February can be a weaker month, and given the relentless rise in the index and ETFs since October 2023 and the recent uptick in the CPI, it may be time for a correction.

On my X-feed, I posted the weekly chart indicating a potential pullback signaled from a VPA perspective. The sharp drop-off in volume suggests weakness, which is a red flag.

What we also have to reference is the options markets, and this week in particular, as it is VIX expiration today, and we have OPEX on Friday, so we can expect additional volatility. The exponential growth in ODTE options has transformed markets for both traders and investors, which is why David & I have included an options module in our Stock Trading & Investing Program. Gone are the days when options were a vehicle for hedging (they still are), but since the COVID lockdown, they are now a prime vehicle for day traders. Program details are available on our Quandumtradingeducation website.

The question now is where next for the S&P500 & SPY and whether yesterday’s correction is simply that or possibly the start of a more meaningful pullback, and the answer, as always, lies in the volume.

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