Tales of a Technician: Do I Care About the CPI?
September 13, 2021
In case you haven’t been keeping tabs on the economic calendar, there is a CPI report scheduled for release this week. With the Fed eyeing tapering, inflation readings like the CPI should carry a bit more weight these days. So, it is understandable that I should get a question like the following showing up in the Team Phoenix Discord channel:
Do you care that the CPI could send everything crashing tomorrow? Maybe October 15 expiration is far enough away to recover from all of this threat — including the Fed meeting coming up?
Query from a wisdom seeker
This is my type of question for two reasons. First, I’ve had to answer it a dozen times over the years, so I have an insightful answer at the ready. And second, I’m supremely confident in the response. I offered a short version in Discord, but I want to delve into the longer-form answer for today’s blog.
First off, this isn’t a question specific to the CPI or Fed meetings. We could substitute both with any other economic release or news event. The gist of the query was whether or not I’m worried about some looming event that could disrupt the market.
The answer, in a word, is “no.”
Here’s why.
First: The questioner assumes that the CPI will hurt the market. Why couldn’t it help? It’s not like this is the first inflation reading of the year. Quite the contrary, we’ve had eight of them (one per month). And what, pray tell, has the S&P 500 done throughout those eight potentially disruptive events? It’s climbed nearly 20%! Logic would dictate that markets are either rising BECAUSE OF whatever inflation readings have been saying all year long. Or, we’ve been rising IN SPITE OF whatever bearish signals the CPI has been flashing to the market.
In either case, it hasn’t been a worthwhile endeavor to overly worry about the details.
The same point applies to the upcoming Fed meeting. If, like Punxsutawney Phil, the Fed governors only came out of their burrow once a year to grace us with their presence, then perhaps it would be noteworthy. But this isn’t the case. Instead, they meet every six weeks. And between the meetings, they’re always jabbering about monetary policy, current concerns, and what may come.
Here again, I remind you that the stock market has ballooned some 20% this year either BECAUSE OF or IN SPITE OF what the central bank has done. So, I don’t know about you, but it seems like whatever they’re doing – it’s working.
If you wait until the coast is clear to invest, you’ll never invest. Uncle Sam wields a firehouse that pumps out an endless stream of economic reports every week of the year. You either get comfortable with the uncertainty or park yourself in cash and get poor slowly as inflation devours your purchasing power.
Now, I’m not discounting or ignoring the reality that something wicked this way comes. Any student of market history will tell you that something wicked is ALWAYS coming. Stocks fall 10% on average about once per year. Once to twice a decade, they tumble 30+%. Uptrends eventually morph into downtrends. No one knows the length or duration of the beautiful uptrend we’ve been blessed with over the past 18 months.
Our safety lies not in dodging potential negative catalysts but in proper position sizing, risk management, and quality trade management. We can’t consistently be in the market for good news reactions and out for bad reactions. Thus, I suggest you accept the news as part of the landscape and rely on the three things just mentioned to deal with the occasional market drop.
In this week’s Options Theory blog, I’ll discuss more how Team Phoenix will be handling the next market downturn.
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Very nicely explained. Thank you coach Tyler.