With Greece facing another week of deadlines, today a legend in the business sent King World News a powerful piece about the the wild swings in major markets and a possible surprise from the Fed.

From Art Cashin's notes: Traders were not so sure that Wednesday's rally was an unalloyed victory for the bulls.  Their skepticism is exemplified in these remarks last night by Keene Little, who works with my friend Jim Brown over at Option Investor:

As far as keeping score, Tuesday's selling was stronger than today's buying across the various indexes. Yesterday's trading volume was stronger and the internals were weaker, which shows the selling continues to be stronger than the buying. Yesterday's saw more than 5:1 down volume vs. up volume whereas today saw about 3:1 up volume vs. down volume. But short covering continues to be the bear's worst enemy and today was no exception.

Except for the tech indexes making new highs and the RUT climbing back above yesterday's close, the blue chips produced inside days and SPX pulled back after closing yesterday morning's gap down. The techs got a big lift from a strong performance by the SOX, which was up +3.9%. The net result is we'll need to see how the next couple of days go before we'll get a better idea as to whether Tuesday's decline was a head-fake move or if instead today's rally was the head fake.

Those "next couple of days" will see us inch closer to the key June 5th due date for a key Greek payment to the IMF.  Twill be a rumormongers picnic.

A Delightful Dinner – Last night, I attended an "idea dinner" with a group of very bright friends.  Among those in attendance were David Rosenberg, Barry Ritholtz, Peter Boockvar, Sara Eisen, Barry Habib and his charming, and lovely wife, Toni.  There were several other equally bright but not so public figures from various areas of finance and even the Fed.

The idea dinner lived up to its name and lots of topics bounced around the table.  I'll consult my mental notes and, hopefully, will explore some next week.

One topic that got a decent amount of attention was Barry Habib's concern about "replacement numbers" in upcoming CPI reports.  Barry, who's always thinking outside the box, is concerned that they may put unexpected pressure on the Fed by creating an "impression" that inflation is stronger than expected.  Rather than try to reconstruct Barry's thesis from my memory, let's look at an email he sent me on the topic last Friday:

As you know, the Fed is mostly concerned with the Core rate, and have, pretty much, dismissed the Headline number due to the drop in oil prices. While their focus may be up for debate, we need to try to watch what we think the Fed is watching.  And the latest read of +0.3% for April only moved the needle fractionally, on a year over year basis…however, that is about to change very soon.

The very important "year over year” Core reading is based upon the latest rolling 12 months.  So the newest reading from April of 2015 replaces the one from April of 2014.  This is where the concern starts – a look ahead at the upcoming months that will be replaced shows that the previous numbers were exceptionally low.  As the new numbers to be reported start replacing the very low numbers from 2014, we can see a large jump in Core CPI that may force the Feds hand and be very disruptive to the markets.

To be specific, let’s look at the 2014 numbers coming up for replacement…

May 0.3%, June 0.1%. July 0.1%, August 0.0%, September 0.1%, October 0.2%, November 0.1%, December 0.1% 

Just a tame reading of 0.2% per month would push year over year Core CPI to 2.2% over the next 5 months.  And to 2.4% by the end of the year.  Obviously, these readings are above the Feds target and may give them the “confidence" to pull the trigger on a rate hike earlier than many are thinking now.

I don’t think this is being closely considered at this time, and worse yet, the markets can be in for a "head fake" because the number to be replaced next month (May 2014) was 0.3%.  So it is possible for Core inflation, on a year over year basis, to decline next month, setting the markets up for a surprise jump in the months to come.  

It's nice to have smart friends who look ahead and warn us of where some "surprises may be".

Consensus – Market's day to day bipolarity looks to continue with U.S. futures softer as Europe is down.  Shanghai got crushed on the margin rumors we mentioned yesterday.  Stay wary, alert and very, very nimble. ***ALSO JUST RELEASED: A Remarkable View Of The War In The Silver Market And A Major Crude Oil Warning CLICK HERE.

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