The Producer Price Index (PPI) confirms the disinflation story that the Consumer Price Index (CPI) showed yesterday. Unemployment claims came in less than expected, showing the Fed can continue its monetary tightening policy without wreaking havoc on the labor market. Earnings season started with mixed reviews with airlines showing strength but consumer goods showing weakness.

Let’s get into the major market drives as we look ahead at upcoming market price targets.

Let’s start off with PPI showing that disinflation is heading in the right direction with month-over-month and year-over-year changes coming in less than the consensus range.

Just remember that producer and consumer prices are directly tied to revenue for companies.  Just as some companies enjoyed higher stock prices due to increased revenue from inflationary pressures, we could see companies report lower-than-expected revenue as prices retreat.

When looking at earnings reports, it’s best if you can find inflation-adjusted numbers to get a feel for the whole story.

Meanwhile, the jobless claims report was issued and showed that the number of new claims fell from last week.  The actual number of 237k fell from 248k and that helped the 4-week moving average fall from 253.25k to 246.75k.

This gives the Fed the information that they need to keep pushing interest rates higher to make sure inflation will truly go away. Despite anecdotal stories or politicians’ platforms of needing more jobs, the data is showing that the U.S. economy is recovering, or at a minimum it is stable.

What’s in store for earnings season? Hard to say so far. Delta Airlines (DAL) is predicting passenger volumes rising on the backs of the resilient consumer. They upgraded guidance, saying that demand for international travel and business will continue to grow.

However, Pepsi (PEP) had a different story to tell, saying that inflation has caused sales to drop. They blamed inflation for the need to raise prices, which contributed to slowing sales. The company also mentioned that inflation has caused its consumers to look at dollar stores and discount warehouses.

As the S&P 500 races higher toward 4500 ($450 on the SPY). That is the high from April 2022, so it’s a level that many have been eyeing since this rally started in June.

Given that we’re at a major line of resistance and the market has had an exceptional 5-day return, let’s not panic if the market pulls back, resets, and then goes after 4500 again.

For reference, here’s the 5-day return of the sectors.

Today’s trade recommendation is on LuluLemon (LULU).  If Pepsi is suggesting that people are adjusting their purchases, it’s no surprise that LULU, the high-end athletic apparel company, is having a hard time breaking higher.  

The stock is nearing a resistance point, but the stock has struggled to march higher with the rest of the market this week. Therefore, my theory is that it won’t be able to break through this resistance.

I’m looking at opening a call spread that will have a neutral to bearish bias.

I’d sell the 18 AUG 400 call while simultaneously buying the 18 AUG 410 call. It’s currently offering a 2.02 credit, which is 20% of the width of the strikes.

If the stock pushes higher than the resistance line on the chart, it may be time to exit the trade, but anticipating a lower move rather than waiting for confirmation can get into this trade with higher credit.

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Jeff Wood

Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab