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The Stealth Bull Market Is Sending A Booming Message

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The Fed may want to take a hint from the market, and stop with raising rates, before it goes too far. Because clear signals are being sent through the markets that suggest, there is no reason to continue to raise rates. Just look at the separation this year, between the financials, industrials and materials sectors, from the technology, biotech, and discretionary groups. It is startling.

Stocks had a strong finish to the week with strong momentum across some of the key sectors, such as technology, biotech, and the chips. But not all sectors are showing the same level of strength. In fact, the financials continue to struggle and the chart in that group continues to look rather weak.

While technology and biotechs are breaking out or near breakouts, the financials are going the other way, and in fact, the trading pattern in the XLF would suggest there are more declines to come. The falling triangle pattern, a continuation pattern, is most definitely a negative warning sign and suggest the group may have further to fall.

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JP Morgan has also struggled to recover from its losses during the middle of the week as well.

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Yield Curve

The pace of the yield curve declining has increased materially, and the latest inflation data from the job report continues to tell us that wage inflation has yet to return.

Inflation

One key inflationary reading is wage growth, and the latest results continue a tepid pace of just 2.7 percent.

When looking at the Personal Consumption Expenditure -another inflation measure, using the chain-type index, and not annualized, the inflation rate is just at 2 percent.

Meanwhile, the trimmed mean PCE, a measure that throws out the highest and lowest outliers, the rate is only at 1.7 percent and continues to remain low as well.

Perhaps the most critical inflation reading, oil, finished the week at a significant level, and should it continue to fall, inflation shall continue to decline as well.

Lumber prices have started falling too.

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Strong Growth

If inflation levels continue to fall, then I can’t see how the long-term rates can continue to rise. Especially in a world where German yields are trading at a spread of over 2.5 percent to US 10-year Treasuries.

It spells more bad news for the banks, and the technical pattern and the inflation outlook confirms all of this.

But the good news, is that the low inflation level is working wonders for the economy, because 2Q GDPNow is forecasting growth at 4.8 percent, and that number has been rising over the past two months. It isn’t that it started at some high level that is falling.  It is a strong reading for this point in the quarter.

What is most impressive about the data, is that it is coming from growth, not from inflation, as our data shows.  The most significant part of the increase, a rise in Private Inventories and Net Exports.

The Stealth Bull Market

It speaks to the rotation we have seen in the equity market lately. Which are the selling of financials, materials, and industrials. Remember financials, materials, and industrials are dependent on inflationary forces, while discretionary, technology, biotech, benefit from low inflation and low rates.

The stock market seems to be sending us a reasonably good message about what it thinks about the future of inflation, and so does the yield curve. Maybe the Fed should take a hint.

In the meantime, Tech, Biotech, Chips, and Discretionary stocks will continue to lead, and leave the rest of the market in the dust.
-Mike

Photo credit via flickr

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