Inflation ! or ?

PUBLISHED Nov 14, 2021, 2:36:13 AM        SHARE

imgTom Hamilton

Nov. 12, 2021 - The big word this week was Inflation. Is its sudden and significant rise a sign of bad news for this market and what are the warning signs? First off I want to emphasize the description of “major” as it relates to market tops. These are not short term 5% to 10% corrections, but ones that are due to longer term weakness in the overall economy, and typically last at least 6 months but can go on for years.

Let’s look at a few signs of a major top. Usually we’ll see that high quality (i.e. government) bonds out perform stocks. We’ll also see “safe haven” sectors like Utilities and Consumer Staples out perform as well. Another sign is that the VIX index (based on the put / calls in the options market) takes a sudden and big move up and it will stay there. I note that (so far) that’s not the situation in this market . . . . could be later, but not now. One other characteristic that happens early on is if major investors see trouble ahead “Value” stocks will out perform “Growth” stocks.

What do we have now? Well Call option activity is very, very high** (a sign of optimistic / speculation). Treasury bonds remain high historically (i.e. low interest rates). VIX gyrates but does not stay very high for very long, and growth is out performing value. Take a look at the relative strength comparison chart below over the past 6 weeks. Small Cap(ital) growth stocks are doing better than Large Cap value; large cap value stocks which would be a “safer bet” for investors. OK, perhaps a sign of speculation, which could be worrisome, but so far not a sign of weakness. chart courtesy of Stock

More discussion & charts at: Take Care. ............. Tom ............

I/we have a position in an asset mentioned

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