Just after I clicked the Publish button yesterday, I saw the monthly CPI figure release. CPI rose by 0.1% month-on-month vs. a consensus expectation of a 0.1% mom decline. Core CPI (meaning ex food and energy) rose 0.6% mom vs. an expectation of a 0.3% rise. The S&P 500 immediately dropped by 2.5% on the news; NASDAQ lost about 3.5%.

In a bull market, investors would likely have shrugged off the announcement as bad forecasting by Wall Street economists or as being inside the margin of error of the CPI calculation itself (which the result isn’t, but a fine point that any bull would ignore). My initial reaction is that the sharp decline is the work of trading bots. It will be particularly important, if unlikely, though, to see whether any buying emerges later in the day, which I would take as a bullish sign.

As it turns out, the decline yesterday was relentless. I find it very difficult to believe the financial press explanation that the CPI number was the cause of the market’s sharp fall. The trigger, yes, but it strikes me as pure magical thinking to say that the Fed would declare victory and stop aggressive rate increases if it say inflation at a “mere” 7.9% or so. So, in my view, the cause, no.

What I find most interesting about Wall Street now is how negative sentiment is. One venerable market cliche is that a bear market doesn’t end until the last bull capitulates. Another, similar, one is that the markets act so as to make the greatest fools out of the largest number of people–that is, figure out what the consensus market belief is and figure out some way to bet against it.

A very eye-catching example of potential capitulation is celebrity commentator Mohamed El-Arian’s advice a week ago on CNBC that investors should flee the “distorted” stock and bond markets for the safety of cash or short-term fixed income. Yes, this run-for-cover message would have been brilliant last December, when the S&P was 20% higher, NASDAQ 25% up, and the 10-year was yielding 1.5%. And, yes, it’s not as apocalyptic as saying buy canned goods and a cabin in the woods. But it’s also a far cry from saying become defensive, find steadily growing, dividend paying stocks and short duration bonds.

Veteran brokerage house strategists are also preaching caution today. My sense, reading between the lines, is that they’re thinking (hoping?) stocks made their lows in June but worry they’ll will revisit those mid-year depths during the mutual fund selling season that starts around now and runs through mid-October.

True, market sentiment has been gloomier, even this year. The mid-June lows are a case in point. Back then a considerable number of companies, most of them recent issues, were trading at or below their net working capital. That’s crazy low. Not quite 2008-09 lows, maybe 1974-ish lows, but definitely lower lows than any other post-WWII recession. Many issues have bounced very sharply since then. But the sheer depth of the June lows is why I think we won’t see those prices again.

Nevertheless, universal gloom is typically a bullish sign.

What to do now?

…what we always should be doing, only in a lower key, namely (in descending order of importance):

–trying not to let worry trick us into doing deeply stupid things

–doing nothing, and, if possible

–upgrading the portfolio by buying stocks that have been pummeled too severely, getting the money by selling iffy stocks that have held up (maybe un-)reasonably well. Early in my working career, I began to notice that my eye always seemed to skip over the worst clunkers in my portfolio, unless I tried really hard to see them. Finding these stocks (I’m convinced everyone has them) and eliminating them while other, better, stocks are still cheap is probably our most worthwhile task.