How Will Market Digest Inflation Data, Fed News?


Simpler Trading Team

Nov 17th 2022  .  5 min read

The stock market is continuing along a choppy, downside range as traders work to navigate the next big move.

Retail earnings reports, the cryptocurrency debacle, and rising bond yields have traders nervous about what unsettling news catalyst may hit the market next.

Simpler’s traders are staying nimble and putting together trade setups based on what the market gives.

Options with Henry Gambell
Futures with Raghee Horner

Market must digest upcoming inflation data, Fed news

Finding trade opportunities in this shifting stock market has become a journey of staying on top of news events, economic data, and central bank actions while being ready to adjust for sudden shifts in momentum.

The ongoing trend isn’t pushing heavily up or down, but lies in a choppy range bound within key technical analysis stock chart signals.

Bruce Marshall, Senior Director of Options and Income Trading at Simpler Trading, regularly watches overnight price action to gain insight into how the stock market reacts to outside influences the previous day. These can include news events (such as a missile striking a European country), after-hours earnings reports, or Fed speeches from the previous day.

Bruce will watch price reactions in the E-mini S&P 500 Futures (ES). This opens up “bigger picture” technical analysis on the ES chart for market movement.

This chart has patterned recent market reaction to key news events such as reports from the U.S. Consumer Price Index (CPI) and U.S. Producer Price Index (PPI), and central bank actions.

Recent CPI and PPI numbers came in slightly less than expected and fueled short-lived rallies in the market, while the Federal Reserve (Fed)  remains hawkish on its plans to raise benchmark interest rates.

The question Bruce keeps asking is, “How is this market going to digest upcoming revelations related to these economic influences?”

Traders must wait until mid-December for the next round of economic numbers to get an idea of whether inflation has peaked and is slowing, or if inflation is holding at near 40-year highs.

“If we get a really hot number and inflation ticks up, it will indicate to the market that we’re far from being over with inflation,” said Bruce, noting the difficulty for traders having to wait.

The Fed, which meets again on Dec. 13, could then maintain hawkish plans to raise interest rates, and the market would keep going down.

Bruce is expecting continued chop in the market until mid-Dec when the economic data and Fed decisions are released. The next PPI report is set for release Dec. 9; CPI on Dec. 13; and the next Fed meeting is set for Dec. 13-14.

Like any day in the trading, there is no way to know what will happen no matter what outside influence the stock market is digesting.

Staying on top of next round of events

Bruce encouraged traders to stay on top of news events and maintain a risk tolerance in their trading plan that allows for quick adjustments.

“If you’re trading this the right way, it doesn’t matter which way we’re going – up or down,” Bruce said.

A holiday lull may be what traders need in the near term.

The holiday week is ahead, and the market historically doesn’t get too crazy with fewer people trading and market closures. The stock market is closed on Thanksgiving Day, and open until noon Central on Black Friday.

“After that we’ll get a more clear idea of which way the market will go,” Bruce said.

There is a lot of time between now and those December news events, and Bruce is not hopeful economic numbers or Fed plans will play out much better. And, this market has shown that anything can happen without notice.

“In the meantime, trade this market carefully,” Bruce said. “Be nimble on your trades.”

Following options trading data for insights

Traders who are members in one of the many Simpler Trading online communities have access to market insights not released publicly.

John Carter, Founder of Simpler Trading, shared some recent analysis he brought to the attention of the Simpler Options trading community.

“Here’s a glimpse into the regular insights delivered by our team of traders on current market movement and how they are looking at trading what lies ahead,” John shared.

Simpler’s traders compiled options trading data from various exchanges and services that yielded insight into increases in trading volume. This shows what traders are interested in, John shared, and he wasn’t surprised with the increased interest in short-term trading.

Here’s what our traders are seeing:

  • Total August, 2022 volume was 912.5 million options contracts, up 13.3% year-over-year and third highest in history.
  • Short-dated options that expire in five days or less represent 51% of the total volume, which is the highest in history and growing. This indicates a growing interest in day trading and trades that last just a few days in the options market.
  • In the last few weeks this has spiked to 60% with increased volume in the S&P 500 (SPX) options.
  • Liquidity on the S&P 500 futures has dropped in half (making it more difficult to complete large trades). This leads to yet more people using SPX options for hedging. 
  • With drops in liquidity in futures, this leads to increased possibilities for a flash crash.

Traders can use this level of data and insight to develop a plan for trading the ongoing uncertainty in the stock market.