Inside Markets — Supportive Data

The SPX is consolidating recent gains and may be on track to move from overbought to oversold levels given the right set of data. A ‘healthy’ consolidation usually implies a 3-5% pullback, which mostly fits the technical picture as 4800 remains an area of key support. Tomorrow’s CPI report will provide the greatest amount of direction. Another MoM increase in CPI would force a rethinking of the bullish narrative, while a dovish print would likely trigger further rotation into equities.

Consensus is looking for a +0.4% headline number, which would put the YoY rate at +3.1%, down from +3.4% last month. The core rate is expected to rise +0.3% MoM and +3.7% YoY, down from +3.9% in January. Using the headline MoM number as a benchmark, we’d expect an inline print of +0.4% or higher to generate some downside in the SPX – maybe anywhere from -1.75% to -2.25%. Anything in the +0.20% to +0.30% range should result in a small relief rally of +25 to +75bp. A headline print in the +0.10 to +0.20% range could be worth 1%-1.5% in SPX upside.

The VIX Index is higher this morning to 15.17, but remains in benign territory as long as it doesn’t rise above 20. A healthy SPX pullback of 3-5% shouldn’t result in the VIX reaching escape velocity, while a 6-7% decline to a sub-4800 close could result in a self-fulfilling volatility problem.

Last time we checked in, the Russell 2000 (RTY) was threatening to break above range resistance below ~2100. A sustained break above ~2100 would be an encouraging development for small cap stocks and for the broader market as increased participation usually results in improved duration/sustainability. The RTY spent the early part of Friday above 2100 but sold off with the broader market to close at ~2083. The RTY is a cyclically sensitive index with notable cracks in Friday’s Jobs Report and a continued slide in iron ore prices potentially capping the near-term advance. The RTY has made four prior attempts to break above the ~2100 level over the past ~18 months. A near-term breakout likely requires supportive data and cross market confirmation.