Momentum Monday – All Eyes on Inflation

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The typical bear market rally is a 50% to 61.8% retracement from the last major high. For the S&P 500 (SPY) that would mean 410-420. It is not far from there. In the meantime, some of the most shorted stocks have staged monstrous short squeezes. Such price action often precedes overall market pullbacks.

The job numbers last Friday surprised everyone. Why does it matter? The market rally in the past month or so has been mainly based on the assumption that the worst of inflation is behind us and the Fed’s tightening is not going to be as aggressive in the future. This assumption might turn out to be a bit premature. We will know soon enough. July CPI readings come out on Wednesday morning. As usual, we will be paying attention to how the market reacts to it; not to the numbers themselves.

Otherwise, the recent rally has been fueled by government spending (clean energy, semiconductor bills), acquisitions (especially in the biotech field), and general improvement in market sentiment – most earnings received a favorable market reaction this season. Let’s see if those catalysts will be strong enough to fight a hawkish Fed.

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