Consumer Discretionary Select Sector SPDR ETF (XLY) rallies with rising short interest ahead of CPI, reflecting potential reversal strategies. Pro-inflation sectors and bonds exhibit bearish sentiment. Markets anticipate CPI's impact on the FOMC decision, with expectations of a 25 basis point rate cut.

CPI is tomorrow, and it is the last data point before the FOMC announces its decision next week.

The consensus is for a 0.20% monthly increase, which is consistent with latest trends. There's also a 90% chance of a 25-basis point rate cut, though this could change if the CPI number surprises.

XLY (Consumer Discretionary) ETF short interest is up 8% this week, which mirrors the pattern observed before the CPI report two months ago.

In both cases, XLY's short interest rose as the stock price increased, suggesting a reversal strategy, or that some traders were shorting while others went long.

In September, XLY, SPDR S&P 500 ETF Trust (SPY), and bonds all sold off following the CPI report.

This week, the S&P 500 and most other sectors are down, except for Technology Select Sector SPDR ETF (XLK) and XLY. XLY was up 12% in November and another 5% this month/week.

On average, XLY short interest decreases when the stock rallies in a momentum-driven strategy, but in these two CPI reports, the trend has been the opposite.

Energy, REITs, and Financials could benefit from an inflationary environment, yet they have been down recently, suggesting that CPI may not be as high. These sectors also have higher short interest, reinforcing the notion that CPI may not surprise to the upside.

At the same time, all bond ETFs show increased short interest, reflecting bearish sentiment in the bond market.

iShares 20+ Year Treasury Bond ETF (TLT) short positions have risen to historic highs since the election.

CPI brings mixed signals: XLY rallies while bonds and pro-inflation sectors signal bearishness. Contact us for deeper insights.

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