Fortune Favors the Bold, but Caution is Still Warranted

The short-term and intermediate-term trends of the market have turned up; and the long-term trend is still negative but has dramatically improved. The market is overbought and a 3-5% pullback is warranted and could take place over the next few weeks. This will be an area to add to existing positions as well as take new ones. Pullbacks are now buyable. Caution is advised, and moderate-to-tight stops should be set. We favor technology and growth over value at this time. Some areas to possibly look for opportunity are the Vanguard Mega Cap Growth ETF (MGK), Invesco QQQ Trust (QQQ), and iShares U.S. Technology ETF (IYW).

The bond market has also improved, and small positions can be bought. Corporate bonds (LQD), convertible bonds (CWB), high yields (HYG), and of course the aggregate bond index (AGG) are all looking like they are turning up.

CPI inflation is cooling, but underlying pressures are still firm. The Consumer Price Index (CPI) was unchanged in July, the first time it has not increased on a month-to-month basis since May 2020, and contrary to the consensus for a 0.3% gain. Much of the relief came from a 4.6% decline in energy prices, the most since April 2020, with both gasoline and natural gas prices sliding. Food prices, however, continued to ascend, up 1.1%, its seventh consecutive gain of 0.9% or more, driven by higher grocery prices.

Core CPI, which excludes energy and food, increased 0.3%, the least since September 2021, and below the consensus of 0.6%. Shelter prices rose 0.5%, slightly less than the 0.6% gain in each of the prior two months, but still close to the most since March 2005. Rents rose 0.7%, also less than the 0.8% gain in the previous month, but still the second most since December 1987. Other notable price increases included drugs (+0.6%), household furnishings and operations (+0.6%), vehicle insurance (+1.3%), and new vehicles (+0.6%). But those were partly offset by declines in used cars and trucks (-0.4%), airline fares (-7.8%), communication (-0.4%), and apparel prices (-0.1%).

On a y/y basis, the CPI eased to 8.5% from a peak of 9.1% in the previous month, and below the consensus of 8.7%. Energy price growth slowed to 32.9% y/y from a peak of 41.6% y/y in the month before. But food prices spiked 10.9% y/y, the most since May 1979.