Morning Report

Dear Reader,

The S&P 500 SPDR ETF (SPY) has moved to overbought conditions after Wednesday morning’s June Consumer Price Index report.

Traders measure overbought and oversold conditions using the Relative Strength Index (RSI). A reading over 70 suggests the market is overbought, while a reading under 30 suggests conditions are oversold. The SPY is back in these conditions for the first time since August 2022, when markets began a sizable downturn toward October lows.

A picture containing line, plot, text, screenshot Description automatically generated

CPI Cools to 4.0% – Now the Hard Part Begins

The CPI registered at 4.0% for the month of May, below the consensus forecast of 4.1%. Inflation is still increasing on a monthly and annual basis, but the rate of inflation has cooled down. The Fed’s rate hikes have contributed to a cooling of inflation, but the central bank still has plenty of work to do. Bringing inflation from 8% to 4% with aggressive rate hikes isn’t the tricky part.

The hard part will be bringing CPI down from 4% to 2%, and holding inflation at these lower levels without further damage to the economy. The global economy has already experienced several shocks. The Fed cannot bring interest rates down aggressively this fall without raising concerns about a resurgence in inflation – a similar challenge to the one faced by the central bank in the 1970s.

The Federal Reserve will kick off its two-day Fed Open Market Committee (FOMC) meeting this morning. At 2 PM tomorrow, the central bank will decide if it will raise interest rates by another 25 basis points. An increase would represent the 11th hike in 15 months, and signal that the central bank needs more ammunition to bring inflation lower.

Meanwhile, investors will keep a close eye on the Producer Price Index for May, a likely 25-point hike by the European Central Bank on Thursday, and Quad Witching (the simultaneous expiration of quarterly options and contracts) on Friday.

With markets now squarely in overbought territory, investors should be cautious about a possible selloff heading into the final two weeks of the month.

That’s because, in addition to the RSI hitting overbought conditions, the same level of extreme greed and optimism are hitting other key momentum indicators that we follow.

The Money Flow Index (which measures price and volume strength) is pushing back toward overbought levels. In addition, the Moving Average Convergence/Divergence (MACD) and the Average Direction Index (ADX 14) are approaching levels seen in August 2022 and February 2023 – readings which preceded large selloffs.

We will continue to monitor momentum at Flashpoint Elite and Midday Momentum.

That’s on the menu for today, and I promise we’ll have our hands full.

Tomorrow promises to be action- and profit-packed. I’ll be going live at 1:45 PM Wednesday in advance of Fed Chair Jerome Powell’s post-FOMC remarks. Few events can move markets as predictably and powerfully as when Powell speaks. I’ll be providing critical context, but, more importantly, we’ll be ready to jump on the opportunities that arise in the moments and minutes after his remarks start. Join us right here at 1:45 PM ET tomorrow – you can go here to register and set a reminder.



Leave a Reply

Your email address will not be published. Required fields are marked *