Inflation, World News Send Market Rallying, Reeling

“Inflation is falling, inflation is falling, inflation is falling – buy, buy, buy!”

That euphoric sentiment washed over market participants Tuesday with news that the U.S. Producer Price Index (PPI) rose just 0.2% compared to the expected 0.4% estimate.

The hot-off-the-press news sent the stock market rallying across the board with all three major indexes bouncing higher.

But before the ink was dry on the headlines, an unexpected world news event sent the stock market reeling.

This all happened under the shadow of a Federal Reserve (Fed) official tossing cold water on the idea that 40-year high inflation is finally receding.

Economic, world news send market higher, lower

Don’t expect the latest inflation data to hold much sway over Fed plans to fight decades-high inflation.

The PPI report released Tuesday by the Bureau of Labor Statistics before the opening bell showed  that costs for companies to deliver final goods to consumers rose 0.2% for October. Estimates pegged the increase at 0.4%, and that positive difference spurred the stock market rally today.

Dow stocks jumped to a 400 point increase early in the day before retreating back to negative in the early afternoon. Equities across the board rallied higher to close the session.

In the market today, the Nasdaq once again was ahead of the pack, closing 1.45% higher at 11,358.41. The S&P 500 gained .87% to 3,991.73 and the Dow eked out a positive day, finishing at .17% higher at 33,492.92 points.

The market boost was credited to October inflation numbers coming in less than anticipated with the PPI showing annual inflation settling in at 8.0% year over year. The number is down from 8.4% in September, and the lowest in more than a year. The highest inflation number in 40 years was 11.7% in March.

PPI tallies of producer costs – less food, energy, and trade services – rose .2% in October, lower than expected. For the 12 months ended in October, the bureau stated, these core index prices moved up 5.4%.

Fed plans haven’t shifted like the fickle sentiment cycle among stock market participants. And Fed officials, according to news reports, believe the market overreacted today.

Fed officials have publicly stated that higher interest rates will continue into 2023, and reducing core inflation is a high priority.

Traders expect market to continue within range

Even with the stock market rallying, overall price action continues to chop within a sideways range.

“We’ve basically been in a range since April, a big range, but it’s a range,” said John Carter, Founder of Simpler Trading. “I think we’ll spend some time in the upper part of this range.”

John doesn’t foresee new highs or new lows this year, as the market continues in this range.

The market is extended, John shared in live trading with members today, and price action is approaching key levels. He continues to watch the S&P 500 testing the 200-day simple moving average with key movement possible this week.

With economic data releases this week and key retail sector companies reporting earnings, John sees the market as “digesting everything,” almost flopping around within the range.

That was evident from the positive market reaction early to the PPI report, followed by a midday negative reaction to news of a missile strike in Europe, and then all three major indexes recovering to close higher on the day.

“Action is bullish – we gapped and we’re trading sideways,” John said.

Top trader focuses on key signal this week

A key technical analysis signal John watches is the $TICK. The $TICK can offer more depth to how the market is moving compared to price alone.

“Price is not always going to cooperate with our anxiety, but the TICK doesn’t lie,” John said.

$TICK measures upward or downward movement in price for a security, or how fast assets are bought and sold. These can be seen by levels and zones – zero shows the market chopping sideways; upper zones show from $600 to $1,000; and lower zones show from -$600 to -$1,000. Continually negative $TICK indicates more selling than buying, or bear market conditions (lower zones).

With market uncertainty heightened this week, John isn’t planning any rash trade setups no matter how the market translates news events.

“No reason to push things – the market is here all week,” John said.

He knows that trades rarely go “exactly” as expected in any market environment.

“Trading is a game of managing anxiety if a trade is not doing what you want,” John said.

He continues to work both sides of market moves using more complex trade setups such as credit spreads.

These offer traders the opportunity to target profits while not being “perfect” with setups as the market reacts and shifts daily.