Bulls sprinted out of the gate Tuesday following another weaker-than-expected inflation report, states Jon Markman, editor of Strategic Advantage.

However, profit-taking in the middle of the session muted gains. The S&P 500 (SPX) finished at 3,992, a gain of 0.9%, essentially recouping Monday’s lost ground.

Bears argue that bulls are over their skis, making too much of weaker inflation data. The October Producer Price Index report on Tuesday showed wholesale prices rose only 0.2% month-over-month, less than the consensus forecast of 0.4%. The PPI helps bulls assert that inflation has peaked.

The Federal Reserve may not agree, yet that may not matter at this stage. Professionals are preparing for a solid year-end rally. They are loading up on the high-beta, or volatile, stocks that perform best in big advances. That means outsized gains for deep cyclicals like financial, industrial, and semiconductor stocks.

Chart, histogram  Description automatically generated

There is good support for the S&P 500 at 3,900, then 3,843, the rising 20-day moving average. Resistance is 4,076, the 200-day moving average.

The Trade: Current position is ProShares Ultra S&P 500 (SSO), a leveraged exchange-traded fund. The SSO was added on November ninth at $43.40, and closed Tuesday at 48.64, up 12.1% from the entry level. Place an order to sell the entire position at $52.90. Place a new stop loss order at $46.49. If this trade works, the potential upside target is +21.9% and the potential downside risk is a gain of 6.7%. 

Learn more about Jon Markman here...