STOCKS REBOUND ON CPI REPORT -- SMALL CAPS LAG BEHIND -- DIP IN BOND YIELDS SHOULD BE SHORT-LIVED

LARGE CAPS ARE ENDING THE WEEK HIGHER DESPITE RISING CPI... This morning CPI report showed annual inflation rising 6.8% to the highest level in nearly forty years.  Despite that high reading, major stock indexes are gaining ground on the day and week.   Chart 1 shows the Dow Industrials climbing back above their 50-day average after last week's successful test of their 200-day line.   Charts 2 and 3 show the S&P 500 and Nasdaq 100 trading well above their 50-day averages.   Small caps, however, continue to lag behind.

Chart 4 shows the Russell 2000 iShares (IWM) trading lower today after meeting resistance at its 200-day moving average.   That's not an encouraging sign for the market as a whole, and partially explains why market breadth figures continue to lag behind this week's gain in large cap stocks.    Bond yields are also down today.

BOND YIELDS DROP... It's surprising to see bond yields falling in the face of today's rising CPI report.   Chart 5 shows the 10-Year Treasury yield ending the week on the downside.   That may partially explain today's rebound in stocks.   That pullback in yields, however, is likely to be short-lived.   Expectations for a more hawkish Fed in the months ahead to slow inflation should start pushing bond yields higher.   That would provide a bigger test for stocks.