Last Thursday's higher than expected Consumer Price Index report for January at +7.5% compared to a year earlier, ignited a flurry of chatter in both bond and equity markets about the likely size of the interest rate increase that will be announced at the next FOMC meeting in March. While markets generally accept rates will rise they don't agree if it will be a 25 or 50 basis point hike. The Market Review updates our regular options and futures indicators along with some comments

S&P 500 Index (SPX) 4418.64 dropped 81.89 points or -1.82% last week after making two consecutive substantial declines on both Thursday and Friday. From last week's Digest: "Should support from the 200-day Moving Average now 4444.23 fail to hold, it will then likely continue lower and retest the January 24 low at 4222.62." The chart shows Friday's close below this important level thereby increasing the odds that it will retest the low.

However now looking oversold, watch for a bounce and closes back above the 200-day Moving Average that could delay a retest of the January 24 low.

The Invesco QQQ Trust (QQQ) 347.06 ended even lower, declining 10.95 points or-3.08%, although the iShares Russell 2000 ETF (IWM) gained 3.00 points or + 1.51% as if to say that's enough, small caps aren't going any lower.

CBOE Volatility Index® (VIX) increased 4.14 points or +17.83% last week ending at 27.36. 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, added 3.64 points or +18.82% to end at 22.98%.

VIX Futures Premium

VIX futures premium on Friday closed at -.91%, in the red bear zone as time premium decay in front-month February contracts accelerate before expiring on Wednesday.

The chart reflects the distance from the VIX to the futures curve computed from the two front-month contracts. 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.

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 turned slightly higher last week as downward momentum slowed again. For the week, it added 9.75 points or +1.67% ending at -574.66, but still well below all of the recent troughs, with the exception of March 24, 2020, at -1256.95, during the Covid shutdown period. Anxious bulls will be watching to see if it can turn higher along with the small cap IWM mentioned above.

Strategy

Until the S&P 500 Index retests the January 24 low and turns higher indicating the big cap sell off may be ending, caution along with selective rotation into sectors showing relative strength such as materials and energy seems like the best strategy while hedging growth positions.

Failure to hold the January 24 low at 4222.62 would likely mark the beginning of the end as the bulls realize they are living on borrowed time, but remember those who arrived at the party early may be reluctant to leave.

Seasoned traders and strategist follow the rule of unknowns by initially positioning their portfolio holdings for both up or down markets, and then adjust, and hedge until the direction becomes apparent.

Summary

The combination of an attention-grabbing Consumer Price Index report at +7.5% along with increasing speculation about the magnitude of the upcoming interest rate increase at the March FOMC meeting sent the S&P 500 Index into a two day dive. Friday it closed below the important 200-day Moving Average, thereby increasing the odds it will retest the January 24 low at 4222.62. Until then continue rotating into value and dividend payers while hedging or reducing long exposure to growth stock and sectors.