Friday stocks: Tame consumer prices prompt a selling pause

North Korean belligerence briefly fades from the front page, as benign consumer prices seem to signal a pause in interest rate hikes.

Who's buying stocks today? Adam Smith's "invisible hand"? (YouTube video tutorial screen capture)

WASHINGTON, August 10, 2017 – As we’re fond of saying in our financial columns, “What a difference a day makes.” After Thursday’s disastrous waterfall decline in a majority of stocks, many stocks are staging a modest comeback rally Friday.

All three widely-followed market averages – the Dow Jones Industrials, the S&P 500 and the NASDAQ – are up fractionally as we head for the final hour of trading, with the Nazz taking the lead, up approximately 0.8 percent (48.98 points) to stand at 6265.63 as we write this article around 2:15 p.m. ET.

Read also: North Korea threat heats up, as stocks tank, big-time

You can see in the two charts below that, from COB Wednesday through COB Thursday, the trusty McClellan Oscillator – a highly accurate tool for predicting the general direction of the market – likely took us to an extreme oversold position yesterday, virtually guaranteeing some kind of imminent bounce in prices. It’s a bounce we seem to be getting today on (unfortunately) low and somewhat unconvincing buying.

McClellan Oscillator for Wednesday, August 9 is bad enough. Today’s will be worse. Note the severe decline below the zero line, an indication that the market may be getting oversold. (Or not.) Chart via, a service to which we subscribe.
McClellan Oscillator, COB 08/10/17, illustrating a now deeply oversold condition that followed Wednesday’s market deterioration. Such conditions often lead to at least a moderate rally in stocks. (Via, a subscription service to which the author subscribes)

Another reason for today’s respite from this early-August bout of selling? The dynamic “Tyler Durden” duo at ZeroHedge thinks they’re onto something:

“Following ‘disappointing’ (to some) producer price data, consumer prices missed expectations for the 5th month in a row with a mere 0.1% rise MoM [month over month] (0.2% exp[onentially]). Year-over-year growth in core consumer prices also slowed for the 7th straight month dropping to just 1.7% – the slowest since Jan 2015. Amid this dismal report, there is a silver lining for Americans, the cost of shelter rose just 0.1% – the smallest rise since March.”

What this means to optimistic perma-bulls is that the Fed is unlikely to indulge in further interest rate increases either in September or at the end of the calendar year in December, given that virtually zero signs of inflation are appearing on the horizon.

We suspect this baffles the Fed, but it doesn’t baffle us. We’ve been preaching for years now that until all that free money Wall Street has been using to pump up stocks goes into the average worker’s pockets – enabling increased purchasing power, more dining out, home improvements, home trade-ups, and fancier vacations – the inflation rate the Fed (and big banks) desperately desire is not going to happen.

Nothing has changed. The geniuses that live in America’s Swamp – aka, Washington, D.C. – still have no clue as to why consumption will not significantly increase. Complicating matters further: Fuel and grocery prices, deemed to volatile for the Federal government’s official inflation measures, are not included in standard price and inflation measurements.

It’s true that for much of 2017, fossil fuel prices have remained relatively tame and relatively stable, putting a bit more money in consumer pockets by default. On the other hand, as anyone who shops regularly as his or her local food emporium already knows, grocery store inflation remains stubbornly high, concealed to some extent by those ever shrinking package sizes whereby, for example, 16 ounces are reduced to 14 ounces per unit but are sold at the “same” price.

(BTW, marketeers, don’t even imagine that consumers don’t know what you’re doing.)

Anyhow, this “good” inflation news are cheering bulls somewhat on Friday, although today’s upcoming 4 p.m. close is, as always, up in the air. It’s not making owners of bank and financial stocks too happy, though, as banks in particular, as well as big insurance companies, desperately need higher interest rates to finally put a little pizazz in those quarterly reports that have remained stubbornly flat for years.

Read also: Trading Diary: Some portfolio perestroika as stocks catch a bid

Also slightly positive news today on the Korea front, if you believe any kind of MSM news consensus. Word from several sources is that despite the white-hot, belligerent rhetoric blasting forth from both Pyongyang and D.C., some quiet backchannel discussions have been going on for some time now between the Norkies and the Trumpistas.

Having been born into the Korean War situation in the late 1940s and having watched that pot boil over again and again throughout a lifetime, please excuse this writer for being a bit skeptical about a North Korean solution that doesn’t involve that country’s utter defeat. These serial murderers and liars have been playing the U.S. and the West for nearly 70 years now, and the situation never improves.

However, in the short term, this gives the bulls some breathing room in this overheated market that’s long needed some kind of correction. But we’ll just have to wait and see what the weekend headlines bring us before we get too excited about yet another resumption of 2017’s long-running, post-Great Recession bull market, of which the Trump Rally (over or not) is but a brief chapter.

Enjoy the weekend, and we’ll see you again on Monday.

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