Are Market’s Telegraphing the First Blush of Inflation?

March 10, 2010 · Posted in Weekly Posts · Comment

US equity markets are overbought, indeed ridiculously so. We seem to be levitating these past few days. While we have seen short covering on he way up to these levels the huge increase in volume in the last two days and the surge of the Nasdaq and Russell to new post-crisis highs is signaling something more than just a short covering rally.

Key observations:

1) Equities are overbought and will likely pull back in the next day or so but have strong support not that far below. The big volume in the last two days is confirmation of the move.

2) Gold and gold mining stocks have come back but are near strong support. They will either break this or begin to rally very soon.

3) USD rather than weakening appears to be in a symmetric triangle consolidation. If this breaks higher then it will be confirmed.

4) Bonds look bearish though we may get a near term pop higher.

A possible scenario that is consistent with equities, gold, USD heading higher (after a near term pull back) while bonds drop (interest rates rising) is the appearance of inflation. Or, one or more of the patterns we are seeing fails. The next week should tell the tale.

Following are the charts of USD, SPX, Gold, HUI, TLT(weekly):