The market rally on the back of July's CPI reading may be 'too euphoric' and investors should still be wary of rising inflation, says DataTrek

• Investors should be wary of diving back into what could still be a bear market, as not everything on the inflation front looks rosy, DataTrek said.
• While consumer prices overall cooled, food inflation hit another high of 10.9% in July.

Investors should be wary of diving back into what could still be a bear market, as not everything on the inflation front looks rosy, DataTrek said Thursday.

While the overall Consumer Price Index cooled, sparking a strong stock market rally on Wednesday, key details raised red flags for the research firm. For example, food inflation hit another high of 10.9% in July, the highest rate since early 1980s. And shelter inflation hit 5.8% last month, the highest since 1990.

The Federal Reserve is also known to follow the "Rule of Threes," meaning central bankers prefer to see three consecutive readings of sequentially lower inflation before they feel comfortable that it's actually on the decline, not just one or two readings.

"Happy as we are that stocks read the CPI report as proof that inflation is heading in the right direction, we wonder if the current rally off the June 16th lows is perhaps a bit too euphoric," DataTrek cofounder Nicholas Colas said in a note.

He referred to the S&P 500's mid-June low of 3666, and since then it has has rallied 15%. Meanwhile, investors have also been selling mutual funds and bonds, which if continued, would signal the market thinks the worst of inflation is already over, he added.

"We remain positive on US stocks, but worry that markets are ahead of themselves here," Colas warned.