Two major events this week had investors rushing from one side of the boat to the other. The bond auctions, followed by the Consumer Price Index report, were both surprises in the opposite directions. Neither could keep the markets up.

On Wednesday, February 9, 2022, the government held its usual U.S. Ten-Year Treasury Bond auction. Bond traders were fearful that investors, especially overseas bidders, would shun the auction, due to inflation fears. Instead, bidders gobbled up the offerings with foreign purchasers accounting for more than 70% of the buyers. The next day, the 30-year bond auction was so-so at best.

The markets interpreted the results to mean that even if the Federal Reserve Bank followed through with three interest rate hikes (or more) starting next month, those actions have already been discounted by the markets. In which case, it persuaded equity buyers that interest rates were probably topping out around here (2%). As a result, the three main equity indexes finished the day with gains of 1.5-2.5%.

The very next day (Thursday, February 10), the Consumer Price Index for January 2022 registered a 7.5% annual gain, which was higher than the consensus number of 4.2%. That threw investors for a loop. It was probably why the Thirty-Year bond auction did not go as well as some had hoped. Stocks swooned but then bounced back up.

And then James Bullard, the Fed’s St. Louis chief, opened his mouth in an interview with Bloomberg News and argued for a supersized rate hike of one percent by July 2022.  Investors immediately dumped stocks, fearing that the Fed was becoming even more hawkish than even the bears had feared. Some suggested we could even see an emergency interest rate hike before the March FOMC meeting. The remainder of the week was all about undoing the hard-fought gains made during the first few days of the week.

The market action tells me that investors just don’t know whether to buy, sell, or hold. I expect this state of indecision is going to continue. Under the index level, certain sectors appeared to be resistant to the selling pressure.

Inflation plays such as commodity stocks like precious, base, and strategic metals, as well as the metals’ miners, food, fertilizer, and agricultural stocks are being bid up on market bounces. That makes sense, given the latest inflation data. Re-opening sectors like hotels, airlines, cruise ships, gambling stocks, and other companies that benefit from re-opening of economies also are doing well.

The reason is obvious. The rapid decline of Omicron case numbers, and the recent relaxation by several states of mask and safe-spacing requirements have traders guessing that economic growth is going to accelerate.  But, if so, the inflation rate will also continue to climb, thus the bidding up in commodity stocks.

At the same time, the “go-to” names in the large cap growth area, are under selling pressure. The FANG stocks are in a distribution phase, which I suspect will continue for some time. Large institutions that have held these names for years and have accumulated millions and millions of shares require time to liquidate them.

Usually, this is a process whereby a slug of stock is sold by a big institution, over a week or so, followed by a period of no sales. That allows the price of the targeted stock to rise again, as retail investors rush in to buy the dip, only to be sold back down again, and so on.

However, these trends are more short-term rotational trades by day traders that can last weeks maybe, but not months.

I suspect that the stock market will remain in a trading range until we get more clarity on interest rates. That won’t happen until the next Fed meeting in mid-March. That will more-than-likely guarantee a few more weeks of volatility, but volatility is better than a period of waterfall declines in the stock market.

Unless something terrible happens during the next week, the market should trade in a large range. As long as the risk gauge called the VIX continues to trade above 20, volatility will remain high. If we get above 4,628 on the S&P 500 Index (the top of my box), then there are good times ahead. Below 4,310, we have problems.