Right now, the market is completely broken.

For evidence, consider the price action over this past month.

One week, the market tanks almost 6% off the back of high inflation data. Yet, the next week it rallies so hard that it almost erodes all the previous weeks’ massive losses.


May’s high Consumer Price Index (CPI) print released on June 10 shouldn’t have been a shock to anyone.

After all, a quick glance at the chart showed that commodity prices rose across the board from the previous month.

But May’s 8.6% inflation number – just 0.3% above consensus forecasts – was enough to spark that massive selloff.

And then, almost miraculously, the market decides inflation no longer matters and rallies 6.5% the following week.

Don’t Kid Yourself

Now, just 12 days away from the next release of inflation data, I’m poring over commodity charts again. In the past couple of weeks, we’ve looked at oil, gold, and agricultural commodities.

And what do they show?

Just about every major commodity has recently rolled over, with many trading more than 5%–10% below their recent peaks.

Although this recent pullback in prices might not reflect in June’s CPI data, it makes you wonder how this crazy market would react if it considered inflation peaked for now.

A softer inflation number this month or the next might cause a massive rally…

But only to reverse the following week when the market remembers higher inflation and interest rates are here to stay.

Because, whatever the month-to-month data reads, inflation isn’t going away anytime soon.

Anyone who thinks the Fed can get inflation back to anywhere near what they might call “normalized” (at 2% in the next couple of years) is kidding themselves.

It’s going to take longer than that. By my reckoning, much closer to five years.

In the meantime, the market is stuck in this crazy place where it massively overreacts to each piece of individual data. Just like we saw in June.

Something Major Is Out of Whack

However, what struck me throughout these recent big swings, is the unusual activity in the Volatility Index (VIX).

Typically, when markets swing wildly you can expect the VIX to spike strongly.

A VIX reading above 20 reflects a period of higher volatility, while a reading below 20 suggests a perceived low-risk environment.

One of my go-to trades for years was buying the VIX when the market was tanking. When the S&P 500 falls, volatility exchange-traded products (ETP) tend to rise.

However, the VIX’s action in this recent selloff has me scratching my head.

When the S&P 500 lost almost 6% to 3636 during the week of June 13 (the week following May’s record 8.6% CPI data release), the VIX closed out the week trading around 31.

I’ve got to tell you… I’ve never seen anything like that.

To give some context, that’s barely three points above its 50-day moving average (MA) at 28.

Compare that back to the sell down we saw in March 2020 when the VIX peaked out at over 80.

If the market falls almost 6% in a week and the VIX hardly budges, then something major is out of whack.

Stay Cautious

While we occasionally see big wash-out days (when institutions liquidate large scale positions) most of these other big swings have come off of low volume.

Meaning, the market is getting pushed around with very little weight behind it.

And that’s why I’m more cautious than usual with this market.

When that big money returns with strong conviction, you don’t want to be on the wrong side of the trade.

Right now, investors are too focused on inflation and interest rates – and as we’ve seen these past months – are making their trading decisions based off them.

Even the war in Ukraine is barely covered now on the major news outlets.

However, it’s always something from left field that rattles the markets.

Although we don’t yet know what that is, I’ll still be waiting for the other shoe to drop.


Larry Benedict
Editor, Trading With Larry Benedict

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