Stock Market Near Climax Low on CPI Day

The fundamental news and sentiment measures have stock market investors on edge. Consensus economic expectations continue to falter. Option trader sentiment and volatility fear gages are hitting extreme oversold levels while stock indices hang over the precipice of new 2022 lows on the eve of the important September inflation report. On October 13th, Consumer prices (CPI) are expected to be reported at 8.1% for September, with core CPI ex food and energy at 6.5%. Anything higher than forecast is expected to send stocks to sharp new lows for the year. While contrary opinion from the plethora of oversold indicators we track is extreme, their crystal ball can’t predict how good or bad the inflation data will be. However, the high degree of pessimism suggests that contrary opinion theory will increase the odds that negative news will be received in a more positive light than most expect after the initial panic market drop occurs.  The seasonality shown below also allows for market lows to arrive this week and possibly the last week of October if there is a weak rally into next week. The shorter-term arrows also support an upward resolution near term. Perhaps the CPI news will be overwhelmingly bad, but be prepared to add to longs short term if sharp selloffs rebound back into to the plus column on the same day.

Our core medium term Exec Spec indicators can be seen here as having reached unusually oversold levels. Readers know we have been forecasting major lows in June and October, which have conformed well with seasonality and our technical indicators. Additionally, we have added a Bear market crash pattern along with ideal percentage correction milestones it indicates. This symmetry outlook has also coincided with our technical work this year, even if the odds of it continuing to trace future market trends may begin to fade. Hopefully, this pattern will not continue to manifest as shown into year-end due to its dire implications, but it is worth watching since it has paralleled the actual stock market movements so well to this point. Earnings compression from a deeper recession forecast would not seem to justify the crash pattern so soon for such a deep correction into 2023. Potential scenarios to speculate as a trigger for a much larger Bear market could be a Bank of England bond type of scare in the US or the equally less predictable shock of a Russia thinking the unthinkable regarding localized nukes. A question we keep asking is: what choice does Russia have? They are losing the conventional war while rapidly depleting their military. They can’t retreat and go home and Putin has delivered multiple allocutions that are difficult to dismiss entirely. The intelligence community clearly thinks, as we do, that a tactical nuke with limited damage is a very real possibility unless peace talks begin this quarter or his intelligence apparatus takes him out. In the meantime, it appears that technically, the weight of the evidence suggests that any panic selloff in October should be bought with a minority portion of portfolio cash reserves we have been building. We would use rallies into November to raise cash and add limited risk Putin puts in the options market in preparation for a setback into early January, if confirmed at the time by our indicators.



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