Stock market participants may have realized today that all the panic buying yesterday was premature.

After a rocketing rally Wednesday, tickers sold off across the board early on Thursday. By the time the closing bell sounded, the three major indexes had recovered much of the earlier losses but were down overall on the day.

The team at Simpler Trading is cautiously working through this volatility with the stock market still facing consecutive, uncertain economic news events.

Stock market can’t sustain fast-rising rally

The fuel to the market rally was comments from Federal Reserve (Fed) Chairman Jerome Powell on Wednesday. When he said, “It makes sense to moderate the pace of our rate increases,” price action raced higher to close out November.

“We went out with a bang,” said Bruce Marshall, Senior Director of Options and Income at Simpler Trading.

Like a booster rocket on a SpaceX mission, euphoria fueling the market burned away quickly as the market fell back to Earth on Thursday.

Of the three major indexes today, only the Nasdaq eked out a positive finish as it gained .13% to reach 11,482.45 points. The Dow closed at a loss of .56% at 34,395.01 points (dropping 194.76 points on the day). The S&P 500 stumbled by .09% to 4,076.57 points.

Fed hasn’t stopped plans for higher interest rates

What many market participants missed in the flurry of media reports of Powell’s supposed dovish shift was that the Fed is still sticking to its plans. Lowering inflation – which includes raising benchmark interest rates as the focal point – is the “have to get it done” target.

The volatile market environment wasn’t helped by mixed data released Thursday morning from the Commerce Department.

The overall Personal Consumption Expenditures (PCE) price index dropped 0.3% to 6.0% in October compared to September. The core PCE price index – which excludes food and energy and is watched closely by the Fed – rose 0.2% for October. This is an increase of 5% over the same time last year.

Numbers from the core PCE price index report showed the monthly increase fell below the 0.3% estimated number, while the annual increase matched expectations. The mixed report contributed to choppy price action Thursday in the stock market.

The mixed data contributed to the stock market losing ground on the day.

Trader dissects mixed message from economic data

Mixed economic data fit well with a mixed message from the Fed that sent the market into a buying frenzy on Wednesday.

Bruce pointed out that Powell “hedged his bet” by hinting the Fed may moderate the rate of rising interest rates, and then quickly followed that comment with a commitment to keep plans in place to curb inflation. This means more interest rate increases will happen, starting at the Dec. 14 Federal Open Market Committee (FOMC) meeting.

Despite Powell’s comments this week, Bruce explained, the Fed could still interpret upcoming data points as not in line with goals and raise interest rates by more than the expected 50 basis points.

Bruce maintains that upcoming economic news events could spur a quick shift in Fed plans over the next two weeks. News events include U.S. nonfarm payroll employment numbers on Friday, “Fed speak” (upcoming speaking events for central bank members), U.S. Producer Price Index (PPI) on Dec. 9, U.S. Consumer Price Index (CPI) on Dec. 13, and the FOMC meeting on Dec. 14.

Bruce is watching like a hawk how the Fed interprets the next round of CPI data.

As of the last report, Bruce noted, the CPI seemingly leveled out near 8% inflation, but will it start declining and, if so, when and how rapidly? These are important questions over the next two weeks.

All the data from news events to date that have sparked the market have been from “cooler” than expected increases, particularly regarding inflation. Overall inflation was “cooler” than expected in the last CPI report, but it was still almost 8% year-over-year and core inflation was triple the level the Fed wants.

At each sliver of “less than expected” the market reacts sharply higher before settling once again into the chop of an overall downtrending market.

“No matter what happens ahead of CPI, the next CPI report will be a huge data point,” Bruce said. “If we come in with a ‘cooler’ number on inflation, that’s going to imply that the (higher inflation) trend is now over and we’re starting to come down the hill.”

If inflation truly does peak and head lower, Bruce expects a rush higher in the market. Such a market shift is not certain.

“We’re at a pretty critical point here,” Bruce said. “There is a lot of data coming out in the next couple of weeks to see if we’re going to go higher or lower.”

Volatile market, inflation spur plans for cautious trading

After this topsy-turvy year, Bruce is not convinced the market is set on a new, higher trend anytime soon.

“It’s very hard to call it from this point,” Bruce said. “It’s a coin toss at this point.”

Inflation remains high and affects the economy and the stock market. Inflation is what the Fed is targeting no matter the effect on consumers or traders.

“I have a hard time believing it’s over,” Bruce said. “Inflation is over and everything is rosy and great? I don’t see it.”

He believes the market will begin an uptrend at some point in the future, but any sustained shift higher could take months or another year. Until the market signals a defined trend, Bruce is focusing on trades with shorter time frames and cautious swing trades.

“Trade management is key to making and not losing money in this market,” Bruce said. “I’m being very careful here with extreme limited risk on everything I trade.”

He’ll stick with his trading plan over the next couple of weeks.

“I know we all like to get in there and trade,” Bruce said. “I think the safe thing to do is watch and wait. I don’t plan on doing a whole lot ahead of that Fed meeting.”

For more on Bruce’s trading plan, catch him trading live as part of the Simpler Trading team.