Inflation Pressures Stable But Precarious
A composite indicator constructed from the trends in yields on the 10 year Treasury bond, gold and the CRB Index suggests that inflationary pressures have decreased. 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
This indicator is not meant to be an oscillator type of indicator that rises and falls with prices. However, since 2010 or rather in this era of central bank intervention, inflation pressures (when the indicator is above the upper blue line) tend to coincide with intermediate term tops in the equity markets. See the gray vertical lines on the chart. Inflation pressures preceded the 2010 and 2011 market tops, and I have no reason to doubt that the current dynamics will be any different. It should also be noted that this indicator was a whisker away from turning extreme again. As pointed out in this week’s “Chart of the Week”, yields on the 10 year Treasury nearly turned bullish. Higher yields, as a manifestation of inflation pressures as opposed to increasing economic activity, would be an equity killer.
