CPI Delivers Pleasant Surprise. Markets Shocked. Short Squeeze Powers Stocks Higher.

Encouraging developments. Waiting for full confirmation. Plus, a new trade.

The stock market got a dose of good enough news this morning as the December CPI had enough positive nuance in several measures to ease the fear of a full head on collision with the Federal Reserve’s recent hawkish turn. The news was certainly pleasant for those of us who have remained patient. On the other hand, the bears got a huge shock as a major short squeeze developed.

Image courtesy of freepik.com

As I’ve noted lately, there was plenty of fear built into this market, so the short squeeze should not be a surprise. Here is a summary of where things currently stand:

• The CNN Greed/Fear Index is at 26 this morning, hovering near its recent lows. This is very bullish given the huge jump in the markets.

• The Put/Call ratio hit a high of 1.03 earlier in 2025 before a secondary reading of 0.97 a couple of days ago. The last two market bottoms came with P/C ratios of 1.25 (8/24) and 1.30 (11/24). This may be good enough to mark a bottom.

• The S&P 500 (SPX) and the Nasdaq 100 (NDX) indexes broke to new intraday lows recently. This morning, they rebounded. NDX is back above its 50-day moving average. SPX is just below its key MA. The two indexes need to hold above these important benchmarks to confirm the reversal.

• The New York Stock Exchange Advance Decline line (NYAD, see below for full details) has been forecasting a bounce over the last couple of weeks as each new low has been met with a higher low in the RSI. This pattern has reliably predicted trading bottoms in the past. Most recently in November 2023, a bottom which sparked a nearly one year rally in stocks.

What to do now:

• Stay patient;

• Stick with what’s working;

• Hold onto any position that is not stopped out. And most of all;

• Look for relative strength, building a shopping list and prepare to move back into the market.

For actionable pointers on contrarian investment, check out this weekend’s post on how to assess truly washed out sectors and how and when to build positions in them.

This morning, I am adding one new trade.

NYAD on the Verge of Confirming Reversal

The New York Stock Exchange Advance Decline line (NYAD) has once again proven to be a diamond level indicator as its relationship to the RSI indicator, once again, may be pointing to a bottom in stocks while other indicators have proved to be less useful. As I’ve noted for several weeks, each new low in NYAD has not been confirmed by the RSI, which has delivered higher lows. This means that each downward thrust in the market has come with less momentum. Eventually, sellers run out of gas and the market turns. The final piece of the confirmation puzzle is a move above the 50-day moving average for NYAD, which holds and eventually moves higher.

So far, so good.

The U.S. Ten Year Note yield (TNX) has reversed its recent upward trajectory after tagging the 4.7-4.75% yield area. TNX was overextended here as the RSI has been above 70 on and off for some time. The best scenario is that TNX drops a bit further, perhaps to the 20-day moving average and stabilizes. A consolidation would buy the stock market some time to build on its current upward trend.

Bitcoin (BTCUSD) remains volatile, yet continues to flirt with the $100,000 area. Let’s see how things develop here. The ADI and OBV lines suggest money is moving back in. We have an open trade in Bitcoin currently.

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