Money Flow – Caution and positioning ahead of the key next week. (CPI and Fed)

After two days of small-cap outperformance, the market returned to large-cap technology leadership. Apple ( AAPL ), Microsoft ( MSFT ), Nvidia ( NVDA ) and the usual names jumped higher after several days of weaker action.

The Russell 2000 lost about 0.5%, but there were signs of buying on the dip that took the index off the bottom. The narrower lead was reflected in breadth, which was negative at the start of the day but ended around 4,400 winners vs. 3650 losers.

Speculative action was weak, with only about 30 stocks gaining more than 10%, but there is more focus on stock picking, which is good for market development. 

Market sentiment is quite bullish right now, but rotational action is very uneven. Market players are still attracted to the security offered by large-cap AI names and are not ready to run wild with smaller and more speculative names.

In addition to stronger bullish sentiment, there is both fear of missing out (FOMO) and a short squeeze. All concerns are being ignored at the moment. Fundamentals are still not positive, but this is not currently the main concern. Technically, a marketer looks good and this is the main focus of market participants.

The economic calendar is still empty today, so there won’t be wild volatility, but there will certainly be some positioning ahead of the important next week at the end of this one. CPI data from the states is due on Tuesday and for now the sentiment on the data is positive, with a significant drop expected. This will be stimulating for the market if the data becomes a fact. The more important part for investors to prepare for is the Fed’s interest rate decision on Wednesday, which will be accompanied by forecasts for the path of monetary policy over the medium/long term. For now, there is less than a 30% chance of a rate hike, with expectations likely to change after Tuesday’s CPI.

The S&P is currently at key levels near a previous local high, and we are unlikely to see a direct breakout and continuation of the move here. It is more likely to consolidate around these levels before CPI and the Fed next move, where it will gauge whether it has more steam to go.

For now, the picture is bullish, but the price is in the middle of an ascending channel, so there is nothing to do here. A correction to 4200 will provide better levels for positioning long, in the direction of the trend.

Russel2000 seems ready to correct to 1826. If it holds this level, we are likely to see an extension of the movement to the levels around 2000. If the data comes out optimistic next week, it will be a good reason for the index to rise. Small caps have lagged behind for quite some time, and given the rally in the other indexes, we may see a catch-up.