With polar opposite forces of money printing (inflationary) and defaults bouncing around the heads of investors, it is not surprising to see schizophrenic inflation expectations. When Treasury Inflation Protected Securities (TIPS) are moving sideways, it is indicative of an uncertain outlook for inflation.

In a debt-saddled world with shaky balance sheets, policymakers want to create positive inflation to (a) keep asset prices from falling, and (b) to "inflate away" debt. All things being equal, central bankers would like to see a healthy TIPS market.

While understandably an extreme example, TIPS consolidated several times in 2007 and 2008 (top portion of chart below), which showed rising concerns about deflationary outcomes. When thoughts of deflation surface, stocks often experience a sell-off soon thereafter (bottom of chart below).

How can this help us today? TIPS have been indecisive for several weeks (see below). If they break below the orange box (< 117.69), it would increase the odds of some type of corrective activity in stocks. The blue arrows show what may turn out to be a bearish double-top.

Similar Weekly Look To Fall 2010

While there are some concerning differences, from a technical perspective the total stock market ETF (VTI) below marched higher after a similar bout of weakness in late 2010. Even if we follow a similar bullish path, next week could see some weakness. Therefore, if we make a move on the long side of the market, it will be in a measured incremental step. In the graph below, note the similarities of the moving averages (focus on the slopes and relative orientation). Breaking to a new weekly high would increase our comfort level with the similarities below.

We may use broad vehicles for some exposure to the U.S. and Europe. We may convert to a dividend heavy strategy once our research is complete, but as of this writing, the market looks strong enough to warrant some exposure. It depends on how we close.