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**Previous CPI trends and data analysis**

Of the last 9 CPI days.. we have seen SPY open up red 6 out of 9 times and of those 6 times… 5 out of the 6 times have been >1% red. Of the 3 out of 9 times that have been green two have opened less than 1% green and one opened 1.8% green.

There used to on previous CPIs be a very clear trend of what to expect going into CPI. Generally we would see a 2%+ drop of markets over the two days previous to CPI. However, now we are not quite seeing that trend as clear. The last CPI was the biggest two days rally pre CPI since March.

Now this could have just been a technical dead cat bounce on an odd timing but there is a chance that markets were expecting a better CPI. Last CPI did beat, however, core missed and wrecked us.

I used to promote puts bounce on night 3 before CPI (so for this Thursday CPI that would be buying puts Monday at close) and then selling them Wednesday night (the night before CPI). However, this is not a recommend play thanks to the last CPI.

**What will CPI be? Are we bullish or bearish?**

Trend wise we actually are seeing a decrease in CPI itself. June CPI was 9.1% followed by Julys 8.5% followed by the August 8.3% reading. That would be two decreases in a row.

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Currently the consensus (the one that matters in my opinion) is 8.1%. That means according to the consensus we are expecting our third decreased CPI in a row. Bullish right? Well on the service yes but lets take a deeper look at this…

Historically speaking this year we have generally seen about a 0.2% +/- variance (0.3% max) on the consensus vs actual reading. This means we can expect 7.9% to 8.3% (7.8% to 8.4% if we use the 0.3% variance).

That means we are actually more likely to see a beat of the previous CPI, however, if it’s the + then we could be looking at 8.3 to 8.4% which would be at best the same. Why does that matter though? If we get a repeat 8.3% reading that would mean that CPI itself is not actually decreasing. This would lead markets to continue to panic about further and bigger rate hikes. As you can imagine if its over 8.3% that would be even worse.

But if CPI is lower than 8.3% we really no matter what right?

Well no not necessarily… this is where I made a mistake last CPI. I over looked how important CORE CPI would be.

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Looking at CORE CPI itself from March until June we were on a decline each reading. However, July came in as the same reading at junes at 5.9%. However, August came in at a huge upset and a huge surprise reading at 6.3%. this was 0.2% higher than the consensus and also as you can see over the previous CPI of 5.9%.

CORE forecast (6.5%) is already set to be 0.2 higher than previous (with their consensus being 0.2% +/-) so we really could be looking at anywhere from 6.3% (no change) to 6.7%. As you can imagine this is pretty much a given here unless the consensus is off by a lot that we at best will remain the same as Augusts 6.3%. Markets are going to want to see CORE decrease.

This whole last week of rallying was set because of the fed pausing rate hikes after this next one. As dumb as this is the markets will get a reality check and any hope of a rally or pause is going to immediately be snuffed out once CORE comes in the same and/or higher.

My thoughts are this BEST case scenario markets get a beat on CPI of 7.9% but a no change on CPI. But the most likely scenario is that CPI comes in at 8.3% (no change) and CORE comes in at 6.7% (huge miss).

The other thing to keep in mind here is that if CORE misses to the upside with the 0.2% variance again and our reading is anywhere over 6.5% (Marchs CORE) then we are putting in a new CORE high for the year.

The question remains then… WHAT does markets need in order to rally? Markets need to see CORE come in 6.2% or lower AND need to see CPI come in at 8.2% or lower. That is the only scenario where I see the markets truly open big green… however, if CPI misses or CORE misses (more specially core) then we are likely to have a repeat if not a worse repeat of last CPI.

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Many people say that the Cleveland fed nowcast is about as accurate as we can possible get. There is usually also a 0.2% +/- variance on this though.

This means we should be looking at a CPI of 8% to 8.4% and a CORE CPI of 6.4% to 6.8%. This means that most likely that CORE CPI number is going to come in on a big miss again and that CPI itself is going to be borderline.

**So whats the play? How am I going to play CPI?**

Remembering like FOMC I trade off the data I have analyzed and what the highest probability risk to reward is…

The issue with CPI is that in the end it comes down to a 50/50 chance. Yes we can analyze the numbers the best we can but in the end we can only guess. But what if we could take a guess out of it? What if we could benefits from which ever way it goes? Ah yes… enters the Stangle!

Strangle Winning side at open (5 OTM Strikes)-

May CPI= Not applicable opened at 0.02%
June CPI= 278%
July CPI= 123%
August CPI= 300%
September CPI= 211%

Looking at the data above had you opened a 5strike OTM strangle looking at the last 4 CPIs you would average on your winning side 228%. Assuming worse case scenario your loser is -100% (most likely itll be close to -90% at open) then you are looking at and average profit % of 128% total.

This means if you had had $2000 total and played $1000 on Calls and $1000 on Puts. You would in total walk away on average with a profits of $280.

Note- July CPI despite a pretty nice -1.5% open did not pay very well compared to June, August and September CPI. If we were to factor out Julys low profits we would then have an average winner side of 263%. This means that assuming worst case scenario your loser is -100% your take home profit % is a total of 163%. This means your $2000 strangle nets you a nice profits of $630.

Worst of the last 4 CPIs nets you 23% profits or $230.

The best of the last 4 CPIS nets you 200% profits or $2000.

Seems kinda like free money right? Well yes and no. The one factor here that could results in a straight loss would be if like May CPI we see markets open 100% flat. However, with in my opinion a lot riding on this CPI I do not forsee that happening. The idea here is going to be CPI beats and markets rallies for 2 months on the false hope of a fed pivot. Or CPI misses and markets panic and start pricing in more rate hikes and potentially a 100bps hike in November.

Now what if you thought CPI was going to miss and you wanted to play it straight up?

Well lets take a look…

Last 4 CPIs had you picked the right direction max gains at open using 5 OTM strike options

June CPI= 278%
July CPI= 123%
August CPI= 300%
September CPI= 211%

That means on average you are returning 228% over the last 4 CPIs with 5 strikes OTM if you picked the correct direction. That means if you chose to use your $2000 to pick one direction your $2000 just became $4,560. However, if you chose wrong your $2000 just because $0 before you could even attempt to do damage control. That’s the one bad thing about CPI being pre market… you cant touch it… this also works if like May we have a reaction then markets reverts to flat before open… you may be right and may see gains you can never even close out.

Worst of the last 4 CPIs nets you 123% or $2,460

Best of the last 4 CPIs nets you 300% or $6,000.

Worst case scenario if you are wrong nets you 0% or $0.

**So whats the play? What the best risk to reward?**

Best risk to reward would be the 5 strikes otm strangle. It is as close to free money and free risk to reward that you can get in a market like this or an event like this. Of course this will ONLY work if there is a big reaction. This will results in a loss if markets don’t move. Granted if the market opens flat the strangle combined would most likely lose less than had you picked one side an chose wrong.

Remember this is 100% a lotto. Even the strangle is not risk free… DO NOT trade money you cant afford to lose or do not want to lose. There will aways be more plays… there wont always be more money.

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