• 288 days Will The ECB Continue To Hike Rates?
  • 288 days Forbes: Aramco Remains Largest Company In The Middle East
  • 290 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 690 days Could Crypto Overtake Traditional Investment?
  • 694 days Americans Still Quitting Jobs At Record Pace
  • 696 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 699 days Is The Dollar Too Strong?
  • 700 days Big Tech Disappoints Investors on Earnings Calls
  • 701 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 702 days China Is Quietly Trying To Distance Itself From Russia
  • 703 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 707 days Crypto Investors Won Big In 2021
  • 707 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 708 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 710 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 710 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 714 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 714 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 715 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 717 days Are NFTs About To Take Over Gaming?
The Problem With Modern Monetary Theory

The Problem With Modern Monetary Theory

Modern monetary theory has been…

Tesla Struggles To Compete In European Market

Tesla Struggles To Compete In European Market

Tesla continues to catch the…

  1. Home
  2. Markets
  3. Other

Inflationary Pressures (Again!)

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.

 

Back to homepage

Leave a comment

Leave a comment