Yesterday’s rally was certainly impressive, and broad based (only 26 of the SP500 constituents closed down on the day), amid decent volume (9% above 20-day average).

So what gives?

Well, per our mid-week snapshot, the short-term technicals (60-minute chart in particular) had a clearly bullish tilt. 

Per the video, we came into the session with your classic (bullish) falling wedge and bullish divergences on our two chosen momentum oscillators:

I also mentioned the key 3,900 support level, which, per the daily chart, sat right atop the uptrend line coming off of the June low:

Key Levels:
–> Bullish on a break >4000 SPX.
–> Bearish while markets hold <4000 SPX.
–> 3900 SPX Put Wall is the bottom of our range.
–> Powell Speaks Thursday, 9/8 at 9:10 AM
–> Mark 9/16 OPEX as a key turning date for markets.

Of course there’s more to markets than the moment-by-moment positioning among options dealers. Indeed, had we not had what was beginning to look like oversold conditions combined with still-high net short interest among SP500 futures traders (big short squeeze yesterday for sure!), along with notably deteriorating sentiment (our own fear/greed index recently moved solidly back into a net-fear reading [contrarianly bullish]) the following commentary from the Fed’s 2nd in command yesterday likely would not have provided quite the oomph that it ostensibly did:

FED’S BRAINARD: IN SOME AREAS, I AM SEEING A COOLING AND DECLINE IN HOUSE PRICES.

“Monetary policy will need to be restrictive for some time to provide confidence that inflation is moving down to target.”

“At some point in the tightening cycle, the risks will become more two-sided,” she said. “The rapidity of the tightening cycle and its global nature, as well as the uncertainty around the pace at which the effects of tighter financial conditions are working their way through aggregate demand, create risks associated with over-tightening.” At the same time, “it is important to avoid the risk of pulling back too soon,” she said.

While, at first blush, the above sounds pretty hawkish, it indeed offers a glimmer of hope for today’s desperate hoper. I.e., “I am seeing a cooling.”   Restrictive until “inflation is moving down to target,” as opposed to “at target.” “Risks will become more two-sided,” I.e., anticipating the emergence of the risk of a disinflationary slowdown due to “over-tightening.” 

Plus, the latest Fed Beige Book (produced roughly two weeks before the monetary policy meetings of the Federal Open Market Committee. On each occasion, a different Fed district bank compiles anecdotal evidence on economic conditions from each of the 12 Federal Reserve districts) was released today. 

The report downgraded its characterization of growth to stagnation, saying that activity was “unchanged, on balance” since July after a “modest” expansion in the previous report. Five districts reported a bit of growth, and five others reported a slight to modest softening in activity.

Consumer spending was seen as steady, with demand for discretionary goods waning but travel remaining a bright spot. Manufacturing was mixed, with supply chain bottlenecks continuing to constrain activity in some locations.

There was a notable weakening in housing activity, consistent with recent data and the general narrative. More broadly, most districts expect a further softening in domestic demand over the next 6-12 months. Labor markets remain tight but show some signs of softening amidst improved worker availability (a la the last payroll report), with some moderation in wage expectations. That being said, in general pay is expected to be notched upward at the end of the year. Still, price gains appear to be moderating across nine of the 12 districts, though most of those interviewed expect price pressures to remain elevated at least through the end of the year.

Yes, I cherry-picked the lines that suggest the economy is anything but an inflation breathing dragon. Which, alas, is what investors and advisors who, in this case the permabulls, wed themselves to their theses and/or are entirely beholden to their personal biases forever do.

In fact, let’s do that again, but with me highlighting what a permabear would see in Crise’s commentary:

The report downgraded its characterization of growth to stagnation, saying that activity was “unchanged, on balance” since July after a “modest” expansion in the previous report. Five districts reported a bit of growth, and five others reported a slight to modest softening in activity.

Consumer spending was seen as steady, with demand for discretionary goods waning but travel remaining a bright spot. Manufacturing was mixed, with supply chain bottlenecks continuing to constrain activity in some locations.

There was a notable weakening in housing activity,
consistent with recent data and the general narrative. More
broadly, most districts expect a further softening in domestic
demand over the next 6-12 months. Labor markets remain tight but show some signs of softening amidst improved worker availability (a la the last payroll report), with some moderation in wage expectations. That being said, in general pay is expected to be notched upward at the end of the year. Still, price gains appear to be moderating across nine of the 12 districts, though most of those interviewed expect price pressures to remain elevated at least through the end of the year.

So, yes, you’re reading that correctly. Any news that says the economy (and, therefore, inflation) may be presently slowing is bullish for equities, as it presumably would have the Fed ease off of their inflation fighting measures. While bearish would be any evidence that inflationary pressures are still running hot, thus inspiring the Fed to keep their feet firmly on the monetary policy break.