Wall Street bank urges hedging into July's CPI - as sell trigger hits highest level in eight years

By Nora Redmond

Analysts at Wells Fargo recommend hedging into July's consumer price index.

Wells Fargo is advising investors to hedge into July's consumer price index as its sentiment indicator hits its highest "sell" signal in more than eight years.

The bank's indicator, which points to extreme bullishness or bearishness in the market, is at 1.4 in August, the level most indicative of a sell since January 2018. To generate the tracker, the price of the S&P 500, the CBOE total put/call ratio, net futures positions, exchange-traded fund flows and the CBOE skew index are all taken into account.

Typically, when the sentiment indicator gets to sell territory, the S&P 500 falls on average by 2% over the next three months, the bank says.

In the past when this same setup has occurred, similarly without any sector-specific extremes, the Nasdaq-100 NDX has been ahead of the S&P 500 SPX by 3% over the next three months - with a 100% success rate, the analysts, led by Ohsung Kwon, wrote in a note on Monday.

Since the beginning of the month, the Nasdaq-100 has risen 4.7%, while the S&P 500 has climbed 3.3%.

The analysts said they see the release of July's consumer price index at 8:30 a.m. Eastern on Wednesday as "a major hurdle" before Nvidia (NVDA) and Broadcom (AVGO) report financial results in two and three weeks, respectively, and the Federal Reserve's summer conference in Jackson Hole, Wyo. at the end of the month.

The market is currently pricing the S&P 500 to advance 0.6% on the day last month's CPI is set to be published, which is lower than the two-year average daily move, they said.

"We see hedges as inexpensive and like hedging against a hot print," the analysts wrote. "A hot CPI likely results in the narrative shifting to stagflation fears, especially after the negative jobs report last week."

Analysts across a number of banks expect year-over-year CPI to come in at 3.4%, down from 3.5% in June. Investors are eagerly awaiting the data, especially after July's jobs report, which was released last week, came in softer than expected, reducing the odds of the Federal Reserve hiking interest rates at its next meeting in September.

However, the Wells Fargo analysts also noted that recent strength in earnings per share in the second quarter is keeping them bullish, as EPS has surpassed Wall Street consensus by 8% on average, growing 30% year-on-year. This represents the strongest growth in over four years.

The analysts added that they see strength broadening out, with non-technology companies beating estimates by 10%, while Magnificent Seven names - Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT)and Tesla (TSLA) - beat by closer to 4%.

Wells Fargo recommends stocks in the tech, industrials and financial services sectors as spending on artificial intelligence trickles down into the rest of the economy.

-Nora Redmond

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08-11-26 0650ET