The Consumer Price Index (CPI) released last Wednesday gave the financial media plenty of material to write and talk about. There is little doubt inflation plays a major role in the Federal Reserve's decision as to when interest rates will begin to rise, but spending so much time focused solely on the CPI seems premature since the Fed uses the Personal Consumption Expenditures price index (PCE) and it won't be released for another two weeks. More follows in the Market Review including an update for WTI Crude Oil.

S&P 500 Index (SPX) 4173.85 ended the week 58.75 points or -1.39% lower after declining 89.06 points on Wednesday following the CPI report. The odds were good that support at the 50-day Moving Average would hold and indeed, it did for the fourth time since the October 30 low, one that was well below the average before rebounding. Wednesday it declined down to 4056.88, then closed at 4063.04 just above the 50-day at 4049.94.

In addition, the yield on the 10-Year Treasury Note added 5 basis points on Wednesday closing at 1.69%. No doubt, the CPI report was a factor along with the Treasury auction of $41 billion of new 10-year Notes. Thursday it made an indecisive inside range day recovering about one-half of Wednesday's decline. Then Friday's advance confirmed the pivot made at support on Wednesday ending the pullback that was nothing more than a slight stumble for the bulls. Since the 50-day Moving Average does a good job supporting pullbacks, Friday's new level ended at 4063.90.

CBOE Volatility Index® (VIX) 16.69 advanced 2.12 points or +12.70% last week after spiking up above 28 on an intraday basis both Wednesday and Thursday. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, ended 2.10 points or +16.71% higher at 14.67%. The six-month chart below shows the quick spike up and return that some use as buying signals.

VIX Futures Premium

VIX futures premium ended at 8.80% in the yellow caution zone vs. 15.72% on May 7. May futures will expiring Wednesday so the premium will likely move back into the bullish green zone as the VIX declines faster than the futures.

Since most of the volume and open interest are in the two closest futures contracts measuring the volume-weighted premium relative to the standard 30-day VIX provides a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds. The chart reflects the distance from the VIX to the futures curve computed from the two front-month contracts.

VIX - VXST Spread

While the VIX Index is calculated using monthly options with 30 days to expiration VXST uses options with 9 days to expiration and includes options that expire in one week making then more sensitive to changes in short term implied volatility.

Typically, the spread is positive with the VIX higher than the VXST. Caution signal are produced when negative as short-term implied volatility increases faster than the standard 30-day measure. Consider it like an options sentiment indicator. Last week the spread was negative every day until Friday when it turned positive again ending at 1.40. The chart follows.

Market Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications, headed south last week declining 153.35 points of -20.44% ending at 597.06 and below the 50-day Moving Average at 641.04. Turning this reliable indicator is more like changing the course of a crude oil tanker at sea than the more sensitive options indicators; it takes awhile. However, any further decline should worry the bulls.

WTI Crude Oil (CL) 65.37 basis June futures closed the week up .47 points or +.72%. Cash ended Tuesday, May 11, at 65.28 down .87 for the week as shown in the chart below.

According to the CFTC's Disaggregated Commitments of Traders - Options and Futures Combined report, COT as of Tuesday, May 11 "Managed Money" including commodity trading advisors (CTAs), commodity pool operators (CPOs), such as commodity ETF managers, and “hedge funds” have reduced their collective net long position as a percentage of open interest from 14.43% on July 21 of last year to 11.40%.

This seasonal chart from Barchart shows the current price exceeding the typical pattern since February.

Joe Ross, a well-known commodity trader, and educator says he goes with the fundamental strength when it conflicts with the seasonal since it means the strong trend has overcome the resistance of the seasonal tendency so the odds favor staying with the trend. 

Supporting the uptrend view this updated Z score chart compares open interest to price since open interest needs to expand to sustain price trends both up and down.

One more thing, Wednesday IEA said economic recovery and oil demand would exceed output.

"The anticipated supply growth through the rest of the year comes nowhere close to matching our forecast for significantly stronger demand beyond the second quarter,'' the IEA said in its monthly report, citing increased OPEC+ production, but revised down its forecast for 2021 by 270K bpd due to lower demand.

Strategy

In bull markets, a good strategy is to stay long equities and/or ETFs and then tactically hedge pullbacks as they begin developing since ordinary pullbacks can become corrections when something unexpected happens. Then corrections can become downturns when something else unexpected happens, and downturns can become bear markets when many unexpected things change medium and long-term fundamentals.

Last week's CPI inflation-induced pullback appears to have ended last Friday.

After all the slicing and dicing of the CPI report advocates of the transitory view seem to prevail as the equity markets just shrugged and resumed advancing. By Thursday, after some reflection it seems the CPI report was not as worrisome as first feared since transient components caused much of the increase, but the core did rise .9%. By Friday, those arguing transitory apparently prevailed.

Yield on the U.S Treasury 10-Year Note ended the week at 1.63% where it began on Monday. For those who may want to dig into the data Tips watch does a good job.

Bureau of Economic Analysis will release the PCE price index on May 28, 2021, two weeks away. Typically, the headline PCE comes in about .3% lower than the CPI.

Hardly noticed on Thursday:  Producer Price Index rose .6% in April following a 1.0 % advance in March. For the 12 months through April, it advanced 6.2% compared to 4.2% for March.

As an inflation hedging strategy, consider raw materials and crude oil producers.

Summary

Last Wednesday the S&P 500 Index declined down to support at the 50-day Moving Average after the release of the Consumer Price Index. Then after Thursday's day of reflection, it turned higher again Friday. While futures and options indicators are not quite yet bullish, they appear headed in that direction, but not Market Breadth. The WTI Crude Oil uptrend continues supported by increasing demand.