CPI Massacre May Send The Stock Market To New Lows

Summary

  • The CPI came in much hotter than expected.
  • Again, stocks find themselves off-side and cratering.
  • Given the move higher in rates, stocks may be heading to new lows.
  • Looking for a helping hand in the market? Members of Reading The Markets get exclusive ideas and guidance to navigate any climate. Learn More »

Brown bear (Ursus arctos). ZOO

fotoslavt/iStock via Getty Images

Stocks may be heading to new lows, and the QQQ ETF (QQQ) may lead them there as real rates explode and the TIPS ETF (TIP) falls to new cycle lows. The S&P 500 (SP500, SPX) will not be immune to these new lows as the index continues to track the 2008 bear market cycle.

Inflation Much Hotter Than Expected

CPI was worse than expected, and what made matters worse was not only was it hotter than expected, this was the month that energy and gasoline were supposed to help the CPI m/m reading turn negative. Imagine how bad the numbers would have been if gasoline prices hadn't fallen by 10.6% and energy hadn't dropped by 5.9%.

For the month, CPI rose by 0.1% vs. estimates for a decline of 0.1%. Meanwhile, the year-over-year reading was 8.3% vs. estimates of 8.1%. But really, what was even worse was that core numbers were much higher than expected, which is the biggest problem. Core CPI rose 0.6% vs. estimates for +0.3%, and rose by 6.3% vs. estimates for 6.1%. Even worse - core was hotter than last month's 0.3% m/m gain and 5.9% y/y gain. It seems core inflation rates are going in the wrong direction.

While once again the equity market was prepared for a CPI miss, the Cleveland Fed was predicting a hotter than expected CPI report and that it was coming in even hotter than the Cleveland Fed's estimates.

Chart

Bloomberg

Worse than that, the Atlanta Fed 12-Month Sticky CPI hit a new cycle high of 6.13%. This sticky measure of inflation has shown no sign of slowing or flattening. It's still rising at a near exponential pace.

Chart

Bloomberg

Rates Soar

Fed Fund Futures are exploding higher, with a peak terminal Fed Funds rate at 4.3%, which is up nearly 30 bps today alone. That's a new cycle high for the Fed fund futures, surpassing the June 14 pre-FOMC meeting highs set following the hot June CPI print.

chart

Bloomberg

2-Year Yield

Two-Year yields also are exploding, climbing 16 bps to 3.74%, and are now well on their way to tracking Fed fund futures to probably above 4%. There's hardly any form of resistance to stop the 2-Year rate from rising to between 4 and 4.25%

Chart

TradingView

10-Year Rate

It may not only be the 2-Year heading to 4% because the 10-Year may be on a similar path higher. The 10-Year also approaches technical resistance at around 3.5%, with very little resistance standing in its way from rising to its next technical resistance level until the 4% area.

Chart

TradingView

Real Yields

Rising nominal rates are sending real yield soaring, with the 10-Year TIP rising to 100 bps, which means the TIP ETF is making another new low. When the TIP ETF makes new lows, it's terrible news for the QQQ ETF and the overall stock market. Because, as we have discussed for months when real yields rise and the TIP ETF drops, the QQQ follows over time.

If the TIP ETF indicates where the QQQ is going and where the stock market is heading, the QQQ will likely be making a new low as the TIP makes new lows. The relationship has been strong for five years, so at this point, to bet on the relationship suddenly decoupling seems low.

Chart

Bloomberg

Nasdaq 100

That spread suggests the Nasdaq 100 (NDX) is very expensive relative to the 10-Year real yield. When comparing the Nasdaq earnings yield versus the 10-Year real yield, we find that the Nasdaq hasn't been this expensive to the 10-Year real Rate since October 2009. To get the spread between the Nasdaq earnings yield and the 10-Year to around 4%. The Nasdaq earnings yield would need to rise by around 60 bps. This is massive and assumes the 10-Year real yield doesn't rise further.

Chart

Bloomberg

That would be equal to the Nasdaq earnings yield rising from 4.4% to 5%, pushing the PE ratio of the Nasdaq to 20 from 22.8. Based on earnings estimates of $538.35, the Nasdaq 100 would be worth 10,760, which is about 12.5% below current prices of around 12,300, and would send the Nasdaq 100 to a new low. That would be the equivalent of the QQQ dropping from $300 to $260, also a new low. It doesn't help that earnings estimates in the Nasdaq 100 in 2022 have fallen to their lowest levels this Year.

Chart

Bloomberg

Technical Trends For Nasdaq

The technical pattern suggests the QQQ makes a new low as well with a bearish rising broadening wedge pattern that has been broken to the downside and has already been retested. This bearish pattern also suggests the potential for the QQQ to fall back to its lows.

Chart

TradingView

S&P 500

The same pattern is also present in the S&P 500. The only difference is that the S&P 500 hasn't seen the index fall below the lower uptrend, and once that level breaks, which would come around 3,900, it would also signal new lows coming for the S&P 500.

Chart

TradingView

Additionally, as noted over the weekend, the S&P 500 continues to track the 2008 analog and appears to still be on schedule, nearly predicting this current turn lower in the market.

Chart

Bloomberg

At this point, the market is repricing for even more rate hikes due to this hotter-than-expected CPI. August should have been a relief month, showing inflation under control. It instead turned out to be a disaster, and once again, we learn that the equity market was mispriced, a recurring theme in 2022.

Join Reading The Markets Risk-Free With A Two-Week Trial!

(*The Free Trial offer is not available in the App store)

See why Reading The Markets has been one of the fastest-growing Seeking Alpha marketplace services in 2022.

Reading the Markets helps readers cut through all the noise by delivering stock ideas and market updates.




This article was written by

Mott Capital Management profile picture
30.66K Followers
Designed for investors looking for stock ideas and broader market trends.

I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.

I use my over 25 years of experience as a buy-side trader, analyst, and portfolio manager, to explain the twists and turns of the stock market and where it may be heading next. Additionally, I use data from top vendors to formulate my analysis, including sell-side analyst estimates and research, newsfeeds, in-depth options data, and gamma levels. 

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Charts used with the permission of Bloomberg Finance LP. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer's views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer's analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer's statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.

Recommended For You

Comments (193)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.