Inflation Holds As Traders Play What Market Gives

Another day, another dollar lost.

Economic data continues to show inflation holding strong, per the latest U.S. Producer Price Index (PPI) report.

As the stock market gyrates, traders can look to trade price action in any direction.

Inflation rises higher than expectations

Across the board, inflation rose higher than expectations according to the latest PPI data. That sent the stock market reeling early and falling hard through the closing hour.

The Dow closed at 33,696.85 points to fall 1.26% (shedding 431.20 points on the day). The Nasdaq was hit just as hard, dropping to 11,855.83 points for a 1.78% tumble while the S&P 500 crumbled by 1.38% to 4,090.41 points.

The PPI data followed the U.S. Consumer Price Index (CPI) numbers on Tuesday with both showing a slight increase in inflation for January. That means inflation is holding above 6% overall.

Full effects of inflation on the economy and the stock market are not clear at this point, according to Bruce Marshall, Senior Director of Options and Income at Simpler Trading.

“We’re not out of the woods yet,” Bruce said, noting that stock market participants drove the market higher yesterday on news of strong consumer spending. 

“The thing that concerns me is that everybody is saying how great everything is and I’m not seeing it,” Bruce said. “‘Yay! Inflation came down from 9 percent to only 6.4 percent.’ It was 3.2 percent before all this and it’s still pretty elevated.”

Bruce pointed out that larger areas of the economy have not yet displayed serious negative effects of inflation.

“What’s more important about that is we haven’t seen the effect on the housing market or auto sales, etc.,” Bruce said. “I don’t know how resilient the consumer is. I hope I’m wrong. I hope everything is great. But we have to look at both sides and think how low could the market go.”

Expect more of same thanks to Fed

Federal Reserve (Fed) monetary policy and ongoing “Fed speak” are also influencing the stock market.

Two Fed officials on Thursday commented during speeches (Fed speak) that they would have preferred to see the last federal funds interest rate increase set at .5%. The Fed upped the rate by .25% earlier this month.

During trading Thursday afternoon, those Fed comments were followed by all three major indexes dropping rapidly into the closing bell.

If the Fed keeps hammering away at inflation, Bruce noted, there will likely be continued interest rate hikes and a volatile market. The market simply doesn’t have a sustained pattern.

“You don’t know which way this thing is going on any time frame,” Bruce said. “That’s what makes it harder to get bullish or bearish.”

Economic areas to watch, according to Bruce, are housing and automotive.

“What’s more important is that we haven’t seen the effect on the housing market or auto sales,” Bruce said. “I don’t know how resilient the consumer is.”

Despite his realistic view of what is happening in the economy and the stock market, Bruce continues to work through the volatility.

“I hope I’m wrong,” Bruce said. “I hope everything is great. But we have to look at both sides and think how low could the market go.”

Light at end of tunnel still far away

Because the market is forward-looking, Bruce does see a light at the end of the tunnel. But it is off in the distance.

“There are still ways to trade this, but it’s much more difficult than it was,” Bruce said. “It’s super hard on a daily basis to have any idea where this thing is going to go.”

He expects the looming Fed policy actions to keep this market in a state of uncertainty.

“We’re closer to the end, but we’re still not at the end,” Bruce said. “And I don’t think we’re that close to the end, yet. We have to be careful out there.”

Bruce continues to follow his trading plan which has carried him through the market volatility over the past two years.

He keeps upcoming economic news events on his calendar and as a part of his daily trading plan. He understands how it can be hard for traders who know what it was like to trade a defined trend before the pandemic sent the market reeling with almost no rhyme or reason in play.

“We have to trade the market we’re in and not the market we wish we were in,” Bruce said. “Until we can get more data points (upcoming economic news), that’s all we can do… trade what’s right in front of us. That makes the most sense.”

Bruce continues to make sense out of the volatility by executing trades on shorter time frames, managing risk, proper sizing of trades, and maintaining strong stops on trades.

To trade in real time with Bruce or other Simpler Trading team members, join the online trading community during market hours.