CPI Gives a Head Fake

Kudos to the dismal science.  Economists nailed their consensus estimates for today’s CPI release.  Headline and Core CPI both matched their 0.4% estimates and there were no revisions to the prior month.  Spot on, no?

Well, traders must be watching the NBA and NHL playoffs because they succumbed to a classic head fake or deke at the open.  The initial reaction to the report was a modest positive – perhaps there was a “whisper number” that was worse than the consensus, despite few overt signs of defensiveness – but futures then took another leg higher, only to peak just around the market open.

ES Jun Futures, Overnight and Regular Session, 1-Minute Bars

Source: Interactive Brokers

Why the rally?  Quite frankly, I wasn’t sure at the time, and I’m not sure now.  The modest sigh of relief seemed fair, the subsequent ramp, not so much. 

I see it as emblematic of the speculative bias that appears to be ever-present in the current market climate.  We see it in short-dated (0DTE) options, but it is hardly limited to that product.  Obviously not, since today’s run-up was propelled by E-mini futures.  We have noted that 0DTE call volume tends to outweigh puts by a significant margin, and we attribute this to the notion that speculators are typically much more comfortable trading from the long side than the short.  Over time, stocks tend to rise, and it is certainly much more natural to try to buy low and sell high. 

Doing the opposite, selling high and buying low, is a learned skill, analogous to a right-handed shooter learning to make left-handed layups.  One can’t play basketball at a high level without that skill, nor can a trader successfully navigate markets if they only trade from the long side.  This is especially true if one trades short-term options. 

In late February, when 0DTE had come into vogue, we noted that those who trade 0DTE options are buying the most unfavorable part of an option’s decay.  Much of the allure of 0DTE options is that they are typically low-priced.  The less time to expiration, the less premium paid.  The lower the outlay, the greater the potential percentage return.  The nasty problem for buyers is that even though the time premium is minimal, it will be gone by the end of the day.  Options expire at intrinsic value, with any extrinsic value vanishing.  We noted this in a real-world example in the linked article.

It would be easy to say that a head fake rally like today’s was pure FOMO.  Speculators hate missing a rally, so it would be simple to pin the move strictly on that factor.  But I suspect it’s something more.  It would not surprise me in the least if savvy traders are exploiting FOMO by ramping the futures in the pre-open to lure in FOMO-driven speculators, then taking advantage of the inflated prices to sell into the rally. 

Let’s take the report for what it is.  Nothing new to report here.  That’s neither bad nor good, and which is why the S&P 500 (SPX) is meandering around the unchanged line, even with megacap techs pushing the NASDAQ 100 (NDX) higher.  The economists got it right, but too many traders got faked out.