Happy Thursday, traders…

Jeff here. 

One factor has dominated the U.S. economy for two years now — inflation.

In an attempt to slow inflation, the Federal Reserve has increased interest rates to the highest level in two decades.

Higher interest rates are generally bad for stocks, as they make it more expensive for companies to borrow money.

This was evidenced by a big dip in the major indexes yesterday morning, with the SPDR S&P 500 ETF Trust (NYSEARCA: SPY) down 1.3%:

You’ve probably heard traders speculating about when the Fed will cut rates, with many predicting that they’ll do so in June.

However, after yesterday’s red-hot Consumer Price Index (CPI) report, the odds of a June cut have lowered substantially.

With that in mind, let’s break down everything we learned from the March CPI report — and explain what it means for your trading…

6 Key Data Points from the CPI Report

First, let’s go over the most important bullet points:

• The CPI rose 0.4% last month and 3.5% annually. Economists had anticipated inflation would increase 0.4% in March and 3.4% annually.
• The latest inflation data showed consumer prices were up 3.2% year over year in February and 3.1% in January, following two months of higher-than-expected inflation rates.
• Despite inflation easing significantly since peaking at a 40-year high of 9.1% in June 2022, the Federal Reserve remains cautious and has not started reducing interest rates. This hot CPI makes it unlikely that the Fed will cut rates in June.
• Contrary to expectations, the U.S. economy remained robust, with 303,000 jobs added in March and an unemployment rate staying below 4%.
• Fed Chair Jerome Powell acknowledged that recent data on job gains and inflation exceeded expectations, with both the number of jobs added and inflation rates in January and February being higher than the lower figures in the latter half of the previous year.
• Powell noted the economy’s faster job addition rate, averaging 265,000 jobs per month through February, is the quickest pace since the previous June.

Alright, enough boring stats — let’s figure out what all of this means for the markets…

What This Means for the Future of Rate Cuts

While inflation is less severe than, say, a year ago … it’s still incredibly sticky.

“This marks the third consecutive strong reading and means that the stalled disinflationary narrative can no longer be called a blip…Even if inflation were to cool next month to a more comfortable reading, there is likely sufficient caution within the Fed now to mean that a July cut may also be a stretch, by which point the US election will begin to intrude with Fed decision-making,” said Seema Shah, chief global strategist at Principal Asset Management.

Think about this as the market is already pricing in a minimum of three rate cuts in 2024…

If the Fed decides it can’t cut rates when the market expects, then another question arises: Does the market really care anymore?

In the short run: yes. In the long run, this won’t be what causes sustained pullbacks…

A serious correction will only come if we see less-than-stellar earnings from the market’s biggest players.

So far, big tech has been remarkably resilient in the face of rampant inflation and higher interest rates.

That’s why we need to watch the earnings story — and the upcoming tech earnings season — very carefully. 

Many retail traders are currently asleep at the wheel. They’re so wrapped up in this crazy bull run that they can’t fathom the idea of the market turning against them.

That said, no one knows exactly what the Fed will do or how the market will react. 

SPOILER ALERT: There’s no such thing as a guarantee in the stock market.

The point I’m getting at is this: you need to be prepared for anything the market throws at you. 

Puts and Calls: Both in the Green

Going into yesterday, I knew we were in for this super-volatile catalyst in the CPI report.

But I didn’t have a crystal ball, I had no idea what was going to happen, so I positioned myself neutrally…

On Tuesday, I bought calls on Dell Technologies Inc. (NASDAQ: DELL) and puts on First Solar Inc. (NASDAQ: FSLR):

I thought there was a high probability that one position would be green in the morning while the other was red, depending on how the CPI came out. 

However, I was in for a nice surprise…

FSLR dumped in the morning and I sold early for solid gains. Meanwhile, DELL quickly recovered from the morning bearishness, sending my 4/12/24 $125 calls into the money.

In the end, by positioning myself to be ready for anything, I was able to bag wins on both contracts. 

The lesson here is to keep your positioning relatively neutral. Always give yourself an out if you’re wrong. Learn to play both sides of the charts.

Bottom Line: If your portfolio is all puts or all calls in this market, you’re probably gonna get destroyed.

Happy trading,

Jeff Zananiri

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