Printer Friendly

eMail Article

May 23, 2008

Inflationary Pressures (Again!)
by Guy Lerner

My inflation indicator is shown in figure 1 below a weekly chart of the S&P500. I have shown this indicator in past commentaries. The indicator is constructed by looking at the strength and quality of the price trends in gold, crude oil and yields on the 10 year Treasury bond. The current value is in the danger zone indicating high levels of inflation, and the vertical lines on the chart mark recent times this indicator was in the danger, high inflation zone. As you can see, the indicator has done a fairly decent job at identifying intermediate term trading highs in the S&P500, and with this last week's poor action, inflationary pressures are working against equity prices again.

Figure 1. Inflation Indicator/ weekly

From a historical perspective, this is nothing new. Since 1984, there have been 50 unique instances where the indicator has been in the high inflation or danger zone. If you were so smart to only buy the S&P500 during these periods, such a strategy would yield a negative 307 S&P500 points with 47% of your trades being winners. The equity curve for this strategy is shown in figure 2, and it should be obvious that being in the market when inflation is high (as defined by the indicator) is not a good strategy. Since 1984, there really is no single period where there is an edge to being in stocks when the trends in gold, crude oil, and Treasury yields are strong.

Figure 2. Equity Curve

Or to spin another way: strength in gold and crude oil and higher Treasury yields really does make a difference for equity prices.

The bottom line is this: high inflation, as determined by this indicator, is a significant head wind for higher equity prices.

To learn more about our quantitative and disciplined investment approach please visit www.thetechnicaltake.com and sign up for our free weekly newsletter and downloads.

Guy M. Lerner may be reached at guy@thetechnicaltake.com.

Guy M. Lerner
TheTechnicalTake.com

Disclaimer: Guy M. Lerner is the editor and founder of TheTechnicalTake.com. His commentary on the financial markets is based upon information thought to be reliable and is not meant as investment advice. Under no circumstances does the information in his columns represent a recommendation to buy or sell stocks. Lerner may on occasion hold positions in the securities mentioned in his columns and on the Web site; in all instances, all positions are fully disclosed at http://www.thetechnicaltake.com. However, their positions may change at anytime. For more information on any of the above, please review TheTechnicalTake's full Terms of Use and Privacy Policy (link below). While Lerner cannot provide investment advice or recommendations, he invites you to send your comments to: guy@thetechnicaltake.com.

Copyright Notice: Except for making one printed copy of this newsletter or any other materials, files or documents available from, accessible through or published by TheTechnicalTake, LLC for your personal use (or downloading for the same limited purpose), none of these said materials, files and/or documents may be reproduced, republished, rebroadcast or otherwise re-distributed without the prior expressed written permission of TheTechnicalTake, LLC.

To view TheTechnicalTake's entire Privacy Policy and Terms of Use, please visit: http://www.thetechnicaltake.com/terms/. To View TheTechnicalTake's Copyright Policy, please visit: http://www.thetechnicaltake.com/copyright/.

Copyright © 2004-2008 Guy Lerner

Image rendition and html coding Copyright © 2000-2008 SafeHaven.com

« BullionVault.com -- Buy gold online - quickly, safely and at low prices »
« Honest Money: A History of U.S. Gold & Silver Currency -- by Douglas V. Gnazzo »

« Opinions expressed at SafeHaven are those of the individual authors and do not necessarily represent the opinion of SafeHaven or its management. Articles are available via RSS/XML. Please visit RSSHelp for instructions. »