A composite indicator constructed from the trends in yields on the 10 year Treasury bond, gold and the CRB Index continues to suggest that inflationary pressures are rising, and this, on average, is a headwind for equities. The indicator is shown in figure 1, a weekly chart of the SP500. I last discussed this indicator and its significance in this recent article.
Figure 1 SP500/ weekly
The indicator remains in the extreme danger zone for equities. Yields on the 10 year Treasury are likely to move higher after finding support following the prior week’s sell off; both gold and the CRB Index (thanks to crude oil) continue to remain strong. QE3 is coming as the Fed and ECB revel in the global liquidity love fest. The price chart shows the buy and sell signals from those times that the indicator was at or above the extreme line since 2009. In other words, if you were so skilled to be in the markets since the 2009 bottom only during the times this indicator was extreme, then you would have made these trades. The only trade that would have worked out for you is the trade that occurred during QE2. During this time from November, 201o to February, 2011, equities powered ahead but so did these other inflation sensitive assets. On average and despite this anomaly due in part to Federal Reserve intervention into the markets, rising inflation expectations are a significant headwind for equities.