The Ticking Debt Bomb

You’ve seen it in the movies…

The hero is faced with disabling a bomb set up in the middle of a busy parking garage before it goes off and takes everything with it. Lights light, flashes flash, beeps beep, and there is a spaghetti plate of wires holding everything together.

It’s the first thing that came to my mind this morning when I was watching the consumer price index (CPI) coverage on CNBC.

3.5% is the number causing all the market angst today. That’s the rise in consumer prices over the last year. It was hotter than the market expected.

The “core,” which excludes volatile gas and food prices, yeah that rose more than expected as well, telling you and I what we already knew… prices just aren’t going down.

I bought my bougie eggs over the weekend at the Kroger. $6.79 a dozen. At the peak of the pandemic, I was paying just over $7. That’s deflation, right? They’re less than they were a year ago.

But in general, we’re seeing everything rise in prices, still.

Transportation services, electricity, and shelter – that’s housing – represent the “hot spots” in the economy.  But we’re just not seeing as much progress as we need.

Here’s how today’s CPI print will affect the markets…

  • Bonds
    • The bond market is seeing a spike in interest rates, as the ten year is now trading above 4.5% for the first time since November.
    • We talked about the long bond on Monday as the 20+ Year Bond Treasury ETF (TLT) is falling farther into its bear market trend. We’ll take out that $90 level I pointed out as critical support, as the TLT prepares for an 8% decline over the next four-to-six weeks.
  • The Federal Reserve
    • Get ready for higher interest rates. The probability of the Fed dropping rates in June just dropped below 50% this morning. If the Fed drops this year, the earliest it will be is July and maybe August. That’s according to the fed funds futures tool this morning.
    • We’re likely to hear the Fed Presidents make a few comments over the next few days to curb investor’s expectations to avoid additional interest rate volatility.
  • Stocks
    • All the major indices shaved more than a percent from their value in the premarket trading. Those losses are continuing into the morning and afternoon trade. Expect this weakness to carry through the rest of the day as investors will be looking for similar inflationary data from the producer price index (PPI) release tomorrow.

Here are your major support levels to watch now…

  • Nasdaq 100 (QQQ) – Shares opened right at their 50-day moving average, which should be considered today’s critical price to hold ($435).
  • S&P 500 (SPY) – The S&P 500’s critical support sits at 507.63, the site of its 50-day moving average.
  • Russell 2000 (IWM) – the Russell’s ETF critical support currently sits at $200, which is where the ETF opened for trading this morning.

Bottom Line

The market will trade tepidly through the day with a higher likelihood of weakness in the afternoon, as investors look forward to tomorrow’s PPI report.

We’ve been talking about a conveniently timed “healthy correction” for the market ahead of the large cap earnings calendar that starts in two weeks. Today’s activity may be the well-timed trigger for that situation to play out.

About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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