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Forget the CPI, Look at the Hidden "W" Bottom

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This morning we finally got the dreaded Consumer Price Index (CPI) numbers that everyone who reads financial headlines was gnashing their teeth about all week.

The CPI rose 0.5% in January versus the expected increase of 0.3%. And this is up 2.1% from a year ago, with consumer prices in January rising at the fastest monthly pace in more than five years.

This is also the fifth consecutive month of year-to-year prices rising more than 2%. Even worse, as Brian S. Wesbury, Chief Economist of First Trust Advisors noted "in the past three months, CPI is up at a 4.4% annual rate, showing clear acceleration above the Fed's 2% target."

Wesbury now believes "New Fed Chief Jerome Powell has his work cut out for him."

And if you were watching the market reaction at 8:30 ET after the numbers were released, you got a great show and lesson.

The "show" was the immediate panic where CME S&P E-mini futures (ES) fell nearly 50 points, or almost 2%, in a blood-curdling reaction over higher interest rates to come.

The "lesson" was the quick recovery as cooler heads, who had calculated all this in advance, prevailed and saw that dip as a great buying opportunity.

And here we are Wednesday before lunch looking at a big fat rally, concentrated in some of the areas you would expect if there were some inflation and interest rate concerns: Technology, Services, and Finance.

For me and my followers, we like to follow the growth in the Technology sector that won't be affected by inflation or rates this year. That's why we were bigger buyers during last week's correction of Alibaba (BABA - Free Report) , Lam Research (LRCX - Free Report) , and NVIDIA (NVDA - Free Report) . We even hung on to Facebook (FB - Free Report) during the tumult.

And we even ramped up our exposure at the lows on Friday with the ProShares UltraPro QQQ (TQQQ - Free Report) , the 3X bullish leveraged ETF on the Nasdaq 100, as we saw an approaching double bottom in one of my favorite "hidden indicators," S&P futures.

To find out what else can we learn from S&P futures, here's the note I wrote last night for my TAZR Trader members, where we were buyers of Friday's lows...

Surveying the Battlefield

On Monday night I mentioned S&P resistance at 2700 and 2760 as big hurdles for the market to deal with.

There's also a little speed bump to get over near the 2720-25 spot which sees an intersection of (1) the Feb 7 highs -- that left a big red wick of eager sellers on the rejection candle -- and (2) the 50-day MA.

So as the fear about our 3 Market Dislocations -- falling ex-US growth, inflation/rates, short-VIX "buried bodies" -- subsides, higher we should go and see what those resistance areas are made of.
Speaking of fear, a fair question about the VIX would be...
"Why does it remain elevated at 25?"
Here's what I posted on StockTwits, in less than 140 characters, to answer that...
$VIX 2 things to keep in mind about elevated vol during bounce: 1) 25 VIX = 1.5% daily moves up or down. 2) Residual effects of $XIV linger
To translate this, the secondary point is a minor nod to the "short VIX" unwind and concern about "buried bodies" yet to be discovered.
The primary point is that we are currently still having 1-2% daily S&P swings and it doesn't matter that the moves are upward. SPX option market-makers still use a daily-to-weekly range forecast to price their risk in selling puts or buying calls.
Those volatility forecasts can be purely quantitative (on one end of the spectrum), or models that blend-in more subjectivity (the middle), or even a lot more directional bias (the other end of the spectrum).
Wherever these players in the "jungle of risk" exist on the spectrum, the market for pricing risk is living in a higher regime of the rainforest.
For now.
Alas, fear will slowly subside, as it always does in a bull market with very low probability of recession or systemic risk.
And all those who try and draw trend lines on the VIX and wonder if it will explode again are the same ones who didn't buy the lows last week.
They are waiting for perfect safety to enter the market again. Pity the fools.

The Hidden Double "W" Bottom That's Already Providing Bullish Structure

For TAZR, I was slightly on the fence today about putting our last chunk of cash to work on the bullish side of the ledger.

I had my buying eyes on SPXL, the S&P 500 3X Bull ETF, between $40 and $42. But I needed to make that decision quickly before lunch time as the grind higher kept going.

Basically, I wrestled with the idea -- laptop in hand, getting a follow-up xray on this stupid leg -- whether we should wait for a smaller re-test of 2600.

I knew the bears were on the run, but I thought we'd get one more head-fake lower to flush out weak/late bulls before we could capitalize on the "Hidden W Bottom."

Yes, there is another "hidden indicator" at work in the markets during high volatility that I have used many times before during strong pullbacks in this bull market.

The hidden indicator that created a "Hidden W Bottom" is the S&P futures ("ES") overnight/pre-market price action.

Astute market players were well aware that the S&P E-mini futures (ES) had made a lower low than the cash index (SPX) earlier in the week just below 2540 simply because the futures had dropped to those levels in the overnight session on Feb 5 at 11pm ET.

The SPX cash market never saw those levels with the gap open lower on Feb 6 (at 9:30 ET) to 2600 and then the all-day surge to 2700.

This hidden indicator is often very useful because it tells you where institutions are willing to step in and buy extremely discounted S&P exposure between when the NYSE is closed.

Why would they do this?

Maybe they are well-long and just wanted to place an additional bet to add some quick-and-easy upside alpha to their limping performance on an expected bounce.

Maybe they missed the chance to buy puts or sell S&P Emini (ES) futures, and hedge their long-only risk, but they definitely recognize when a market has gone too far to the downside and their quant models see values everywhere overnight with the S&P approaching 2500.

Here is a chart of the S&P E-mini Double "W" Bottom, with those lows occurring on Monday night and Friday afternoon...

The message: The bears better be heads up if this scenario is unfolding.

Followers know that I don't care for hard-drawn "trend lines." But the basic idea still holds about where the market wants to gravitate upwards to and where the sellers might be.
More importantly, since the market is forging bullish structure (W-bottoms, higher lows, threatening higher highs) in a fundamentally favorable environment -- after a big panic flush -- then the odds are on our side to continue to seek higher levels and new inflection points of bull-bear battles.
This doesn't mean that large, long-only institutions aren't chomping at the bit to sell into the rally and unintentionally create a "hard W" with the SPX cash back below 2600. (I say "unintentionally" because large sellers aren't thinking about "bottoms" right now, but only how to preserve capital in case the market crashes further.)
But it does give us a strong chance to probe above S&P 2700 before then.
The great thing about our portfolio is that we are so well-positioned in key growth stocks, we don't care which way the index moves from here.
2% higher or lower tomorrow within the range only lights our fuse for better action and reaction!

(end of TAZR commentary for 1/13)

As I publish this note at 2pm ET, the S&P 500 was pushing into its highs for the day above 2695.

Pity the bears. It looks like they probably missed both messages from the S&P futures: the "W" bottom on Friday and today's CPI head-fake memo.

Disclosure: I own BABA, FB, NVDA, LRCX and TQQQ for the Zacks TAZR Trader portfolio.

Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the Healthcare Innovators and TAZR Trader services. You can follow him on Twitter and StockTwits @KevinBCook

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