A Rate Cut Buying Stampede

Posted by Cam Hui - August 13, 2025

Mid-week market update: Yesterday’s July CPI report came in roughly in line with market expectations. Headline CPI was a hair below consensus, while core CPI was a hair above consensus. Even as the bond market greeted the report with caution, the stock market responded with a risk-on stampede in the expectation of a September rate cut.

The market reaction was not a big surprise. The latest BoA Global Manager Survey, which was done before the CPI print, showed that the institutional consensus called for falling short-term rates in the face of rising inflation.

The Animal Spirits Are Back

The animal spirits are back. Small-cap stocks, which had been the
laggards, led the charge as the Russell 2000 tests the top of a resistance zone (top panel), and a relative resistance level (lower panel).

IPO stocks have rocketed up relative to the S&P 500, indicating a rebound in risk appetite.

Similarly, ARK Innovation Fund (ARKK), which is a proxy for speculative growth stocks, is testing a key resistance level (bottom panel). Its relative performance (dotted red line, top panel) is rising quickly, and so is Bitcoin, which is a real-time banking system liquidity proxy.

More Room to Rally

Stock prices have the potential to rise further from current levels. Goldman Sachs reported that hedge funds de-risked as stock prices rose, and its equity sentiment indicator registered the lowest reading since June. Further gains could force institutions to chase beta to catch up in performance..

Monthly options expire on Friday. SPY is trading well above the 625 strike which is the site of the the highest Open Interest. If the market were to try to pin SPY down to 625 and spark a downside gamma hedging chase, it needs to decline soon – and quickly. Otherwise, we may see strong upside as we approach OpEx Friday.

Words of Caution

Before you become too bullish, here are some words of caution to consider. Even as the S&P 500 breaks out to all-time highs, negative divergences are everywhere. The 5 and 14-day RSIs are exhibiting lower highs, which are negative divergences. The percentage of stocks above their 20 and 50 dma, both of which are barely above 60%, are weak indicating weak breadth.

As the S&P 500 rises above its upper Bollinger Band, will it continue on its upper BB ride while exhibiting “good overbought” readings on RSI, or will the negative divergences resolve themselves in a pullback?

Breadth has broadened in the last few days, but the trend is still negative. Should you bet on the breadth turnaround or is the breadth reversal just a minor blip?

Investors may see some bullish or bearish catalysts in the near future, starting with the PPI report tomorrow morning, the Trump-Putin meeting Friday, or the Fed’s Jackson Hole Symposium that begins August 21. We are entering a period of rising VIX seasonality.

Stay tuned.

1 thought on “A Rate Cut Buying Stampede”

Ken says:

August 13, 2025 at 1:42 pm

When the NASDAQ 100 hit a new high the other day, less than 50% of stocks in the index were above their 50 day moving average. On a bell curve of past new highs, this was at the extreme left shoulder as in one of two other times. This NASDAQ/Technology move higher is extremely narrow. Those two occurrences historically of extreme narrowness led to big downswings afterwards. Just saying.

Of course, there was no AI or Trump favoritism of Silicon Valley back then,

Comments are closed.

logged in