Does The CPI Reading Indicate A New Bull Market?

In the history of the US economy, taming inflation has never been done without the effective Fed funds Rate going above the CPI. Today, CPI came in at 4.9%, and the effective Fed funds rate. Since the S&P 500 ($SPX) nearly touched 3,500 in October of 2022, we have been in a steady, structural uptrend, despite the Federal Reserve's measures to tighten the M2 money supply. Today, the 10th of May, $SPX went as high as 4,152 before pulling back in the morning session, around 18% higher than the October lows. 

Jerome Powell has been consistent in saying that this Federal Reserve will not make the mistakes of the past (primarily referencing the stagflation of the 1970's). Moreover, that this Federal Reserve will keep the terminal rate "higher for longer," and that all tools will either be in use or not based on the economic data. Meanwhile, the bond market has been raising red flags of recession for months on end, and yield curve inversion is extremely steep. As of this writing, for example, the US 01 Month Yield is above 5.5%. For reference, this rate was below 1% until June of last year. 

This is a polarizing time in markets, as both bull and bears can make viable cases for the path forward. Instead of the narratives, I suggest looking at a variety of charts to understand where we are at in the current economic and business cycles. Each of the following charts was pulled just moments before the CPI release (ahead of PPI on Thursday May 11, consumer sentiment on Friday May 12, etc). Using these charts and following this price action will help us to understand if indeed yesterday's CPI reading means we can officially declare this a proper bull market. 

($USO Weekly Chart image)

On news of the OPEC+ production cuts, $USO broke above the "bull flag" trendline, but then gave up those gains within a few weeks. This was in indication of lower demand, hence the need to limit supply. If after today, the price of $USO steadily rises, this will indeed indicate business activity, tourism, and other common things associated with bullish economic momentum. 

($WTI Daily Chart image) 

On $WTI Oil Futures, a similar gap up occurred on the OPEC+ production cuts, the gains were given up, and price action is now inching back up. The blue line pathway looks to be invalidated, whereas the yellow line trendline of higher highs and higher lows would demonstrate oil demand globally. 

(S&P500 $Spy ETF)

As this pennant gets tighter on the daily timeframe, the next move up or down should be a large one. If we break to the upside and can take out swing highs of 420 and 430, the market would be interpreting not only that we are on the "no recession" path, but that the bull market could be resuming. 

(Nasdaq ETF QQQ / $Spy) 

It is no secret that the macro-caps, specifically those in tech, are leading the way. While many are interpreting this as a lack of breadth, it is also true that often macrocaps lead the way in resumptions of bull markets. This means that the lack gap created by the lack of breadth will be closed by other stocks catching up, not by stocks like Apple and Microsoft rolling over and losing value. 

(Crypto: Bitcoin chart)

The correlation between the run in the Nasdaq in Q1-2 of 2023 has been directly related to the run of Bitcoin BTC/USD. Several minutes before the release of the CPI data, there were many technical reasons to look at downside. $31,000 was a sharp rejection, then $30,000, became resistance, and bounces off the 50 day ema occurred 9 times before failing. At the same time, structurally, a head and shoulders formation had formed. If $BTC does the improbable and reverses course, breaking above $31,000, this would have to be interpreted as room to run in broader markets with healthy risk appetite. 

(XAUUSD Chart, Gold Spot Price)

Gold has an inverse relationship with rate hikes. With the effective Fed funds rate above CPI, the market is likely to interpret that the Federal Reserve is at its terminal rate (at least for now). Gold can continue its run above all time highs if we are the terminal rate, if there are rate cuts and quantitative easing resumes, or could have a parabolic move if the 2020's turn into a period of stagflation like in the 1970's, or if the dollar ($Dxy) downtrend continues. It is too early to tell just what will happen, but looking at the flow of liquidity into precious metals may be telling. For instance, if the market interprets that returns here will be better than elsewhere, then the market would likely be interpreting stagflation as opposed to a bull run. 

(XAGUSD Chart, Silver Spot Price)

Silver is another interesting precious metal to have on the watchlist for a number of reasons. Much of the same reasoning listed above for gold applies. Additionally, silver's industrial use cases are in electric vehicles, batteries, solar energy, and semiconductors (just to name a few). A continued move to the upside for silver could demonstrate economic activity (bull run), as well as a safe haven for preserving purchasing power in the event of stagflation and / or deflation. Plus, while gold is very near its all time high, silver's all time high is $49.45, which was reached back in 1980. Silver would have to double in price to reach a new all time high. Lastly, structurally, we can chart an inverse head and shoulders pattern, a cup and handle, and a bull flagged that has popped to the upside. All bullish. 

With this article, my goal is to provide an overview into which charts and what price action I will be closely watching in the next few days and weeks. In summary, there are many charts missing from a complete and thorough analysis to determine whether we are in a bull, bear, or kangaroo market. For example, we would also need to study the real estate market, consumer credit status, forward corporate earnings projections, macroeconomic trends, geopolitics, and plenty more. Little by little, we intend to do all of that here, so please stay tuned for more!