How do we know the Consumer Price Index released on Thursday didn't surprise? Interest rates declined and since stocks favor lower interest rates – they advanced. Markets dread accelerating inflation since it precedes rising interest rates that hurt both bond and stock prices.

Apparently, both the bond and stock markets accept the transitory inflation narrative, at least for now. The May Consumer Price Index advanced .6% at an annual rate of 5%, with the core CPI up .7% at an annual rate of 3.8%. As evidence, the yield on the 10-year Treasury Note declined 5 basis points while the S&P 500 Index gained 19.63 points or +.47% after Thursday's report.

The Market Review updates our indicators with the S&P 500 Index at another new high.

S&P 500 Index (SPX) 4247.44 crawled up 17.55 points or +.41% in narrow trading ranges. For the first part of the week, it was like watching paint dry. Then on Thursday after the CPI report, it gained 19.63 points responding to the yield on the 10-Year Treasury Note dropping 5 basis points to close at an amazingly low 1.45%. The 50-day Moving average at 4166.29 should provide the first downside support followed by the upward sloping trendline that began at the October 30 low, advancing in parallel.

Invesco QQQ Trust (QQQ) 341.24 gained 5.64 points or +1.68% last week responding to lower interest rates that disproportionally benefit growth stocks with higher than average price-to-earnings multiples or no earnings whatsoever. Borrowing a term from the bond market, growth stocks are said to have a long duration or the amount of time investors need to wait to recover their initial investment. For the week, it advanced at four times the rate of the SPX. Now accelerating up and away from the 50-day Moving Average at 333.32 that represents first support should it encounter unanticipated trouble, it will soon likely test the previous April 29 high at 342.80, as long as the yield on the 10-Year Treasury Note stays throttled around 1.50%.

CBOE Volatility Index® (VIX) 15.65 declined .77 points or - 4.69 % last week. 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, dropped 1.16 points or -9.66% reaching another bullish 52-week low at 10.85%.

The last time implied volatility (orange line) declined to a comparable level occurred on January 17, 2020 at 9.58%, when the SPX advanced 1.97%. However, implied volatility will eventually revert to the mean of its relevant range. Based on low option prices now is the time for contrarian bears (if there are any still alive) to get busy.

VIX Futures Premium

$VIX futures premium on Friday ended at 14.03%, still in the bullish green zone, down from last week ending June 4 at 16.42%, as June futures near expiration on Wednesday, with the last Trading on Tuesday, when any remaining June premium dissolves.

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.

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, delighted the bulls by gaining every day last week adding 127.70 points or +17.86% ending at 842.65, well above the positive sloped 50-day Moving Average.

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. Narrow trading ranges reflect the consensus view that prices are about right, with few buyers willing to pay higher prices and more importantly when at new highs, an absence of substantial selling that suddenly increases the supply. The Narrow Range trading system assumes that when a stock trades sideways in a narrow range it often precedes a breakout up or down on increased volume.

Typically, the combined volume of the stocks in the S&P 500 Index is around 2 billion shares daily. With the index trading in narrow ranges all last week the volume was under 2 bn shares every day except Tuesday at 2.1 bn. On Thursday after the CPI report, 1.9 bn shares traded. Often higher volume indicates pivot points with wider trading ranges, but not necessarily. For example, 3.4 bn combined shares traded on May 27, yet the SPX traded in only a 15.60-point range. Key Reversals, defined as a new higher high, with a lower close on the day normally trade in wider ranges and require increased volume to confirm the change of direction.

Since the Federal Open Market Committee of the Federal Reserve meets this week, with a news release scheduled for 2:00 on Wednesday, the markets will go through the same guessing process listening for any hint that the Fed will begin considering tapering quantitive easing.

Summary

Unlike the April Consumer Price Index report, this time for May, the markets expected higher inflation numbers since interest rates on the 10-Year Treasury Note declined 5 basis points to end at 1.45%, and both the S&P 500 Index and the Invesco QQQ Trust advanced. On Friday, the S&P 500 Index closed at a new high and made a new intraday high on Thursday. Options implied volatility declined to a 52-week low and now challenge lows made in January 2020. Market Breadth improved all week confirming the current bullish view.