Bulls Buy on Lower Odds of Rate Hike, but Is It a Trap?

The economic news on Thursday morning was hotter than expected and suggested that inflation remains a problem, but investors shrugged it off and delivered some upbeat action. Both the producer price index and retail sales were stronger than expected, but much of the jump was due to higher energy prices rather than discretionary spending. Consumers are spending more — but it’s because of higher prices, not because they are feeling wealthier.

Once this information was digested, the odds of a rate hike on Nov. 1 dropped from about 41% to 32%. That was a good excuse for buyers to jump in, and they did.

Breadth was close to three-to-one positive, with the Russell 2000 fund (IWM) leading with a gain of about 1.4%. Still quite a few new 12-month lows were seen at around 250, and the pockets of speculative trading were very narrow, but buying of small-cap related ETFs was what caused the move.

The initial public offering of ARM (ARM) also helped the market mood as it gapped open above its IPO price of $51 and closed over $63. There were plenty of folks questioning the valuation, but demand was strong, and that spilled over into many of the big-cap AI plays.

Technically, it was a solid day and put the S&P 500 back above its 50-day simple moving average, but the issue recently has been inconsistency. Neither bulls nor bears have been able to generate sustained momentum, and it is particularly tricky in front of next week, which historically is the weakest week of the entire year.

The bulls are feeling pretty good after the action on Thursday, but the risk of a bull trap is high.

Have a good evening. I’ll see you tomorrow.