How savvy traders are positioned ahead of Thursday’s inflation report

By Jani Ziedins | End of Day Analysis

Oct 12

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The S&P 500 finished Wednesday in the red for the sixth session in a row. As bad as that sounds, the index only lost -0.3% in an almost trivial down day given recent volatility.

As I’ve been telling readers over the last several sessions, the market is stuck in a holding pattern ahead of Thursday’s monthly inflation report and we can’t read anything into this price action. The real move will follow Thursday’s inflation report, which will be one of three things; higher than expected, lower than expected, and the middle ground, meets expectations.

Higher and lower than expected inflation will result in a big stock move in the opposite direction. A break in inflation will send stocks flying, while stubbornly high inflation will trigger the next big selloff. (God help us if inflation spikes to a fresh high!)

What about “meets expectation”? Well, that largely depends on where the market is, and right now we are at the lowest levels of the year, meaning expectations are fairly pessimistic. Some would say overly pessimistic. At these repressed prices, we are setting up for a relief rally if inflation comes in “less bad than feared”.

Stocks rally in two cases, beats and meets expectations, and they fall in one, misses expectations. Those are fairly favorable odds for a rally Thursday afternoon.

That said, even if bulls have the edge with stocks at the lowest prices of the year, I’m not placing trades ahead of the inflation report. This is one of those cases where I’d rather be a little late than a lot sorry, so I’m happy sitting in cash and waiting for the market to tell me what it wants to do next instead of joining everyone else in the game of guessing and gambling on the outcome.

The market likes to throw in a few head fakes immediately after the news lands, but within 30 minutes, the pent-up supply and demand will be too strong to continue the charade and the market will be tracking straight and true for the next big, multi-day move. All we have to do is grab on and enjoy the ride.

Buy strength and sell weakness, it doesn’t get any simpler than this.

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.