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
With the announcement of QE3, yields on the 10 year Treasury have moved significantly higher in anticipation of inflation. Gold and commodities have been soaring for weeks. With QE 3, the indicator has moved to its most extreme position, and similar past extremes are noted by the red dots over the price bars. Typically, such extreme readings in the indicator are seen late cycle and have preceded some of the ugliest market downturns including 1987, 2000, 2002 and 2008. The take away message is that liquidity can push stocks only so far. At some point, inflation pressures become a serious headwind. Until that point in time, it is rocks over paper. Or hard assets over paper assets.