With investors expecting consumer prices to fall month-over-month heading into the day, this morning’s higher-than-expected headline and core CPI reports caused an instantaneous reversal in market sentiment heading into the opening bell.  While equity index futures were indicating a gain of around 75 basis points heading into the print, after the release, indications were for a decline of 2%.  When the opening bell finally rang, the S&P 500 gapped down 2.27% as indicated by the tracking ETF – SPY.

Going back to 1998, today marked just the sixth time that SPY gapped down in excess of 2% on the day of a CPI release. As shown in the top of the table below, on four of the five prior 2%+ gaps down on CPI days, SPY not only gapped down by over 2%, but it continued lower throughout the trading day.  While that doesn’t necessarily bode well for today, we would note that on many of those prior occurrences, there were other overriding factors impacting the market.  From the Russian debt default and collapse of Long-Term Capital Management (LTCM) in 1998 to the Financial Crisis in 2008, the US debt downgrade in 2011, and then COVID in 2020, on most of these other days, investors had other issues besides inflation to worry about.  The only time that there wasn’t another major issue impacting the market was on 5/14/99 when headline CPI exceeded forecasts by 0.3 ppts and core CPI exceeded consensus estimates by 0.2 ppts.

At the bottom of the table, we have listed every other time since 1998 that core CPI exceeded consensus forecasts by 0.3 ppts or more.  Today’s report is just the fourth time that core CPI has topped estimates by such a wide margin, but what stands out most is that every other prior occurrence since 1998 came after COVID.  We noted numerous times in the past how COVID has created so many distortions in the economy that the job of forecasting it has become exceedingly difficult, and the fact that every ‘beat’ of this magnitude in core CPI has occurred since COVID only reinforces this point.  Click here to learn more about Bespoke’s premium stock market research service.

It has now been 14 years since Lehman Brothers’ last day as a solvent company – an event that set off one of the biggest market meltdowns of all time.  In hindsight, the events leading up to and after September 2008 may not seem all that bad.  How quickly we forget.  Three-quarters of a century removed from the Great Depression, most Americans had never given a second thought to the safety of the funds in their savings account or even money-market funds, but shortly after Lehman, these were legitimate concerns on the part of all Americans.  People were actually going to ATMs and taking out extra cash to literally put ‘under their mattress’ just in case they woke up and the ATMs weren’t working anymore.

Most of these extremes came after the Lehman bankruptcy, but the period leading up to Lehman wasn’t a picnic either; that’s actually why Lehman went belly-up.  From the S&P 500’s peak in October 2007 through 9/12/08, the S&P 500 was down over 20%.  But after an early summer sell-off, the S&P 500 rallied from mid-July to mid-August before selling off into Labor Day.  Heading into the weekend after Labor Day, the S&P 500 was down 4% from its mid-August high but appeared to be stabilizing at a higher low relative to July. With the S&P 500 still down 20% from its all-time high, you couldn’t have faulted someone heading into the weekend for thinking “maybe I’ll try to buy something on sale.”

On 9/12/08, stocks may have been on sale relative to the October 2007 highs, but any buys on that day would quickly go down as one of the ‘worst trades ever.’  After Lehman announced its bankruptcy that weekend, cracks spread all over the financial district from a Wall Street parched of liquidity.  September ended with a decline of nearly 10% but continued to get worse from there, and by the following March, the S&P 500 was down just under 46% – or 71% annualized – from its ‘pre-Lehman’ close’.  Stocks that seemed cheap less than six months earlier were now down by nearly half, so getting back to even from there would pretty much require a double. Speaking from experience, any investor who bought any stocks in those six months quickly felt like the stupidest investor in the world.

While any equity purchases made 14 years ago just before Lehman collapsed quickly turned into some of the worst trades ever, time is an investor’s best friend.  Anyone who had time gradually looked less foolish. From a longer-term perspective, the decline from September 2008 to March 2009 still looks painful, but over time, the market (as it has to this point always done) dug itself out of its hole. The snowball effect of compounding has rewarded investors who were in it for the long haul.  Not including dividends, the S&P 500 has rallied more than 228% since the Friday before Lehman’s bankruptcy, and including dividends, it has delivered an annualized return of more than 11%.  You’d probably sign the bottom line as fast as you could for an annualized return of 11% between now and 2036!

Not bad for what seemed like the “worst trade ever” at the time.  Click here to learn more about Bespoke’s premium stock market research service.

The latest CFTC’s Commitments of Traders report with data as of last Tuesday was released on Friday. This report tracks how speculators are positioned among various futures which we show as a net reading in the charts below.  Positive readings indicate a net percentage of open interest is long whereas a negative reading indicates a larger share of speculators are positioned short in a given future. Below, we take a look at those readings for a handful of precious metal futures.

As shown, gold has rarely seen more shorts than longs over the past decade and is the only precious metal currently positioned net long (+22.29%).  However, that is not to say this reading has not been weakening lately.  This past spring, the reading fell outside of the past few years’ range, reaching a low of 18% back in mid-July.  While the second half of July and some of August saw it rebound, last week marked three straight weeks of declines. Meanwhile, silver futures have seen positioning turn outright short recently. With a net 9.24% of open interest positioned short, that is the most pessimistic positioning reading since May 2019.  Likewise, it has been almost four years since platinum has been as heavily bet against as now.  Finally, palladium has also seen speculators turn against it in the past year to a degree not seen at any point of the past decade.

As we do each Monday, in tonight’s Closer we will provide a more in depth rundown of this data for a wide variety of assets.

As speculators turn increasingly bearish, we are actually coming off of a very strong week for metal adjacent ETFs.  As shown in the screenshot of our Trend Analyzer below, the best performing ETFs last week in our US Groups screen were gold miners (GDXJ and GDX) as well as the Steel ETF (SLX) that tracks steel producers and suppliers.  The Junior Gold miners (GDXJ) rallied double digits over the prior five days, which was a move that lifted it out of extreme oversold territory and almost back up to its 50-DMA.The Gold Miners ETF (GDX) was not far behind with an 8.85% rally.  SLX was only a percentage point behind that as it presses into overbought territory for the first time since August 29th.  Click here to learn more about Bespoke’s premium stock market research service.

Welcome to Bespoke Brunch Reads — a linkfest of the favorite things we read over the past week. The links are mostly market related, but there are some other interesting subjects covered as well. We hope you enjoy the food for thought as a supplement to the research we provide you during the week.

While you’re here, join Bespoke Premium with a 30-day free trial!

Tech Dystopia

The Rise of Mobile Gambling Is Leaving People Ruined and Unable to Quit by Maxwell Strachan (Vice)

Problem gamblers used to have to drive to a casino or at least a gas station. Now, smartphones deliver a near-constant barrage of prompts and opportunities to gamble, creating disastrous consequences for personalities who are attracted to risk. [Link]

‘It’s a slippery slope’: Most consumers underestimate monthly subscription costs by at least $100, study says by Sarah O’Brien (CNBC)

Low monthly prices, automatic payments, and easy sign-ups mean that consumers are paying over $100/month in forgotten subscriptions. [Link]

China

China’s COVID-19 Stagnation Has No End in Sight by James Palmer (Foreign Policy)

Political leadership remains anchored to its zero COVID policy. [Link]

China’s Economic Slump Bodes Ill for Birth Numbers by Liyan Qi (WSJ)

Low birth rates mean Chinese deaths are set to outnumber births as soon as this year; models suggest the total population is set to fall from just over 1.4bn to below 800mm by the end of this century. [Link; soft paywall]

Ukraine

‘We have already lost’: far-right Russian bloggers slam military failures by Pjotr Sauer (The Guardian)

Far right military bloggers in China are starting to lose hope that the country’s invasion may eventually succeed as Russian lines collapsed in the country’s east and south this week. [Link]

Russia Is Buying North Korean Artillery, According to U.S. Intelligence by Julian E. Barnes (NYT)

Facing shortages of key inputs for construction of even the most basic military equipment, Russia is turning to minor allies to source warfighting material. [Link; soft paywall]

Loosening Markets

Housing Market Update: Mortgage Rate Spike Further Cools Homebuying and Selling by Tim Ellis (Redfin)

Some markets are starting to see outright price declines as new listings plunge, price cuts abound, and the combination of soaring mortgage rates and sky-high prices destroy demand. [Link]

Ocean Shipping Rates Have Plunged 60% This Year by Costas Paris (WSJ)

After a desperate scramble to book freight capacity amidst an avalanche of demand for goods, retailers are faced with inventory overhangs and the freight market is falling apart with shipping rates collapsing in 2022. [Link; paywall]

Retail Activity

Robinhood Unveils Index to Track Customers’ Favored Stocks by Alexander Osipovich (WSJ)

A new index constructed by free-to-trade brokerage Robinhood weights stocks by their customers’ “conviction” or relative frequency shares are held in customers’ accounts. [Link; paywall]

EXCLUSIVE Deal partner for Trump’s Truth Social fails to get backing for SPAC extension -sources by Svea Herbst-Bayliss (Reuters)

As a deadline to approve the proposed blank check takeover of Trump’s nascent social media company loomed, the transaction looked like it might be in doubt. [Link]

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Have a great weekend!

There’s still time left in the trading day which means that anything can happen, but the equity market is on pace to close out the week with a Friday gain or loss of 1%+ for the 22nd time this year.  Going back to 1953 when the five-trading day week started on the NYSE, there have only been four other years where the S&P 500 rallied or declined at least 1% on the final trading day of the week (there have been another six where there were 20).  The only years where there were more 1% moves to close out the week were 1974 (23), 2000 (25), 2002 (23), and 2008 (26).  Keep in mind, though, that while this year is just four off the record-high pace, there are still 16 weeks left in the year!  The year is only two-thirds complete, but already Fridays have seen a lot of action.

To make more of an apples-to-apples comparison, on a percentage basis, 61% of all weeks this year have closed out with a one-day move of at least 1%.  Granted, it’s not a full year of prices yet, but in prior years since 1953, there was never a year where the S&P 500 closed out the trading week with a gain or loss of at least 1% more than half of the time.  In 2008, half of all weeks ended with moves of that magnitude while the percentage in 2000 was 48.1%, and 1974 and 2002 each closed out the week with 1%+ moves 44% of the time. These levels of volatility are a far cry from a year like 2017 when there wasn’t a single Friday that the S&P 500 rallied or declined 1%. Click here to learn more about Bespoke’s premium stock market research service.

Although the S&P 500 managed to bounce yesterday and today (as of this writing), further declines in the days prior have meant sentiment continued to take a header. In the latest update, only 18.1% of responses to the weekly AAII sentiment survey reported as bullish. That marked the third consecutive decline in bulls resulting in the weakest reading since the end of April.

Bearish sentiment in turn has rocketed higher, climbing back above 50% last week and rising further to 53.3% this week. That is the highest level of bearish sentiment since the week of June 23rd and ranks in the top 2.5% of all weeks on record.

Given the large inverse moves in bulls and bears, the spread of the two has fallen deeper into negative territory after almost turning positive only a few weeks prior.  We would also note that the over 30-point drop in the past month is the largest since a 47.4-point decline at the end of April and ranks as the 29th largest decline in a four-week span on record. With 23 weeks of negative readings in a row, the current stretch is now the second-longest streak of negative readings in the bull-bear spread on record.

Investors appear to be increasingly polarized between bullish and bearish sentiment as well. As optimism and pessimism have experienced wild swings, neutral sentiment has been relatively stable.  Neutral sentiment only rose one percentage point this week, rising to 28.7%.  That is right in the middle of its recent range. Click here to learn more about Bespoke’s premium stock market research service.

Although this year has seen seasonally adjusted jobless claims drift higher, the indicator is on a four-week-long streak of sequential declines.  The latest reading released this morning fell by 6K to 222K from the downwardly revised number of 228K last week.  In total, claims have now fallen by 30K during that streak of declines and are another 9K below the high of 261K from mid-July.

On a non-seasonally adjusted basis, claims were up slightly from 173.9K to 175.8K.  Modest increases are the standard for this point of the year as claims have likely put in place their seasonal low before turning higher into year-end. As shown in the first chart below, this week’s reading is historically strong but came up short of the lows for the comparable weeks of 2018 and 2019.

Although initial claims have been improving and came in lower than expectations, the opposite is true for continuing claims. Lagged an additional week to initial claims, seasonally adjusted continuing claims rose to 1.473 million (expectations of 1.438 million) which is the highest level since the start of April.  Unlike initial claims, in spite of recent increases, continuing claims have ample headroom until they reach their pre-COVID range as current levels remain consistent with some of the strongest in over 50 years.  In other words, even though initial claims have found respite and have reversed lower, the opposite is true for continuing claims which is evident through the ratio of the two having taken a sharp turn lower in recent weeks. Click here to learn more about Bespoke’s premium stock market research service.