July CPI Could “Make or Break” Market

Stocks fell this morning as tech companies continued to issue profit warnings. The tech-heavy Nasdaq Composite led the market lower (-1.30%) as the S&P trailed behind (-0.50%). The Dow fell only slightly (-0.20%) by comparison.

The trading session got off to a rough start after Micron (NASDAQ: MU) told shareholders that quarterly revenues may “miss” estimates due to “macroeconomic factors and supply chain constraints.”

This sent shockwaves through the tech sector as even Tesla was hit by the selling. MU shares were down roughly 5.60% through noon.

Micron’s profit warning was especially damaging as it came just one day after Nvidia (NASDAQ: NVDA) issued some similar pre-earnings guidance of its own.

“We have slowed operating expense growth, balancing investments for long-term growth while managing near-term profitability,” said Nvidia CFO Colette Kress yesterday.

“We plan to continue stock buybacks as we foresee strong cash generation and future growth.”

Yes, buybacks are indeed bullish, but when earnings are sinking, that’s going to take precedent over any impact from share repurchases. NVDA reports earnings on August 24th.

“[Micron and Nvidia] are two big players that I think investors thought were in a better position to navigate through some of these recent supply chain issues. I think there’s concern that this is really going to weigh on tech,” said Oanda analyst Ed Moya.

Another factor to consider is the “crypto winter” of the last year, which has squashed demand for GPUs, alongside new technology in the crypto space. Ethereum, for example, will soon transition from proof-of-work to proof-of-stake mining. Proof-of-work requires computer hardware. Proof-of-stake does not.

As more cryptocurrencies shift to this model, GPU demand should continue to fall.

“The extent in which cryptocurrency mining contributed to Gaming demand is difficult for us to quantify with any reasonable degree of precision,” Kress said during Nvidia’s Q1 earnings call.

“The reduced pace of increase in [the] Ethereum network hash rate likely reflects lower mining activity on GPUs. We expect a diminishing contribution going forward.”

Outside of crypto, the July Consumer Price Index (CPI) also comes out tomorrow morning, and Moya believes bulls may be in for a rough stretch of trading as a result.

“Everything that we’re getting is [showing] that inflation is having a much harder impact on corporate America outlooks, and that’s why I think this market is going to be difficult to continue to buy equities,” he said.

It’s been all downhill for the S&P after the index touched the June highs yesterday.

A bad CPI print would, in all likelihood, spark a selloff back to the June lows. That’d be a drop of about 11% for the S&P.

The problem with the current bear market rally is that it’s happened at a breakneck pace. It was a bit of a short squeeze in that short interest was relatively high when the rally began.

But since stocks started climbing and Wall Street began covering its shorts in response, more shorts have been added to hedge for a sudden collapse. This is a bit of a double-edged sword as a rally past the June highs could cause a massive short-squeeze, crushing those hedges in the process.

If, however, stocks fall again, Wall Street is expected to load up on additional bearish positions, driving the market substantially lower.

That makes tomorrow’s CPI release a potential watershed moment for the market this year. A low number could trigger a major short squeeze. A “hot” reading could just as easily cause stocks to test their June lows.

And, amid so much tech pessimism over the last two days, that’s certainly not an ideal situation for bulls, most of whom have reached a state of complacency unseen since last year.


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