It only took the slightest hint that inflation is finally on the retreat to trigger the biggest bull run on Wall Street since the initial post-COVID relief rally. But the question on just about every serious trader’s weary mind is whether this is the start of a real recovery or just another head fake.

After all, we’ve seen too many head fakes in the last six months to blindly buy another dip without hard evidence that stocks are ready to get back to work. Unless the market mood has decisively changed, there’s little point in maintaining a buy-and-hold posture.

And if this is just one more technical bounce, the bulls are already close to their limit. That scenario argues for locking in profit ahead of the next lurch to the downside . . . because the ceiling is too low to make a lot of money in the near term.

I see the S&P 500 climbing at most another 3% before the bulls start gasping for air. The NASDAQ crashed harder in the last few months, so it has a little more room to bounce . . . but even on that side of Wall Street, it’s going to take hard work to continue the rebound beyond Thanksgiving.

We’re unlikely to get a lot of help from the Dow. As you know, the Fed has revealed an uncanny ability to start talking the bulls down whenever the blue-chip index strays too far beyond the 200-day trend line.

Right now, we’re close to 4% above that theoretical ceiling. If Jay Powell can keep his mouth shut, we’ll know for a fact that inflation has receded to a level where the Fed will grudgingly allow Wall Street to print even a little money. That will be a great day.

The Fed Calls The Plays

But I’m not sure the landscape has shifted enough for the Fed to even think about declaring victory. Yes, inflation has dropped to “only” 7.7% since peaking in June, which comes as a relief to everyone who had given up hope. It’s a good sign.

However, prices are still rising about four times too fast for the Fed’s comfort. And it’s taken the most aggressive rate hikes in a generation just to keep inflation from spiraling completely out of control.

The last time inflation was this “benign” was February, when the Fed decided that one way or another, the easy money of the COVID era had to stop flowing fast. That’s when interest rates started rising above zero.

Rates are going to keep rising until inflation drops below 7%. That’s going to take at least another month or two, which gives the Fed at least a few more opportunities to hit the economic brake.

And while they’re focused on the brake, I don’t see Powell letting Wall Street’s natural exuberance get in his way. When the stock market prints money, it feeds inflation. He’s shown a preference for seeing money in the market evaporate, which makes his work easier.

So the inflationary picture has softened a little . . . without really changing. There’s room for relief on the horizon at last . . . but no tangible reason to cheer yet. And that means there’s little tangible reason to buy the market as a whole unless you can commit to the possibility that you’ll need to wait until next year for an appreciable return.

Patience is in short supply these days. If you’re still more concerned about the current economic environment than the recovery ahead, I don’t suggest buying the market as a whole. Hold your cash and get some sleep.

Trading The Range

Even if you have that patience, it’s important to pick your spots so you can avoid frustration along the way. It’s been a rough year. Give your nerves a break.

The Dow is already in precarious territory. If Powell lets it climb another 2%, I’ll be impressed. A drop of at least 4% from here is more likely. All it takes is a harsh word from the Fed or an economic data release that goes the wrong way: too hot, too cold, simply unexpected.

While a deeper decline is unlikely for the Dow at least, an outside shock could send the blue-chip index back down about 10%, erasing all of this week’s bounce and more. In theory, we could even see a 15% lurch to the downside on a big enough shock.

With a tentative ceiling as high as 2% above us and a historical floor down 4-15%, the risk simply outweighs the likely return on the Dow. Ignore it for now. Most of its gains came from Microsoft (MSFT) and Salesforce (CRM) anyway, which we’ll discuss in the context of the NASDAQ in a moment.

If you love the Dow, wait until it hits that floor before buying the dip. Likewise, the S&P 500 could rise another 2% before hitting long-term resistance . . . or give back as much as 7% of this week’s gains before finding support.

Sooner or later, every ceiling and every floor cracks. But that kind of breakout move usually requires a catalyst, some headline factor that motivates investors to buy or sell stocks in a hurry. I don’t see a lot of catalysts in the next few weeks, which means the technical lines will likely hold above and below us.

In that scenario, it’s going to take hard work for the S&P 500 to give you more than 2% in the near term . . . and if it goes the other direction, you’re looking at a bigger short-term loss. That’s not a favorable risk-return profile either. Ignore.

The NASDAQ is the opposite story right now. It’s fallen so far that the 200-day trend is still 8% above it even after this week’s spectacular rebound . . . the bounce can continue. And if the mood goes the other way, tentative support is now only 3% down from here.

Even in an apocalyptic test of last month’s low (thanks again, Jay Powell!), the NASDAQ might give back 11%. Balancing that worst scenario against a potential 8% continuation rally isn’t so bad. If you want a major index, this might be the one to play for the time being.

But I have to say the unsung hero here might be the small-cap Russell 2000. The Fed doesn’t seem to care so much about knocking this index down. There isn’t a lot of money in these companies and the political blowback from getting in their way is relatively high.

The Russell is above all technical resistance now. If it falters next week, it should find support 5-6% down from here . . . but if it keeps rallying, there’s nothing to get in its way below the August peak.

That’s a full 7% in the sky at this point. Can we see that happen? Unlike the big benchmarks, it’s a statistical possibility. The odds are relatively good.

I’ve been talking about why small is beautiful in the market lately. This is just another example.