Morning Notes — Tomorrow’s CPI Report

SPX: In mid-August, the S&P’s failure to get through its 200-day moving average at ~4330 resulted in the reemergence of broad-based short selling with several sub-sectors back to year-to-date highs in terms of short interest.  Investors remain fundamentally cautious with gains over the last four sessions largely dismissed as short covering and forced participation. We’re also fundamentally cautious but recently noted the potential for this September to be uncharacteristically resilient as perception builds around de-risked ’23 estimates post-Q2 earnings revisions. We also stay more open to a potential near-term bullish shift in macro fundamentals based on weekly internal momentum divergence in the days preceding the mid-June rebound. Weekly momentum divergence was present in the days leading into 4 out of 4 major bullish inflections since 2009. Those initial rallies were also dismissed in the first few months, but grew as the fundamental backdrop improved.

Chartist: Friday’s rally took the S&P 500 (SPX) through pattern resistance at 4020-4040 and the break above 50 and 100-day moving averages likely triggered some CTA re-leveraging. The next level of CTA-driven upside momentum is just above 4200 with levels above ~4275 triggering significant systematic flows.

Catalyst: Consensus expectations for tomorrow look for headline CPI to be down -0.1% MoM vs. 0.0% in July, which translates to +8.0% YoY, down from +8.5% last month.  Given light positioning and extreme bearish sentiment, we see the potential for an inline print to drive continued equity upside, while a YoY rate of 7.9% or lower would likely result in an SPX test of the 200-day moving average at ~4275.