Since early Fall of 2021, we have been urging readers to focus on the fact that many of the economic and market indicators we evaluate were just not adding up. You may recall the numerous times that we've conveyed a puzzling sentiment that contrasted the fact that the market was going up while several concerning underlying technical conditions were questionable and more likely bearish (at face value).

At the same time, our own Mish was repeatedly writing and speaking publicly about how to adjust your investment position to prepare for what was coming. Her message was simple. Inflation would soon exceed expectations (which veteran investors know is not good for growth equity valuations).

To make matters worse, higher-than-expected inflation would lead to "stagflation," which would be the "surprise" problem that would finally weigh on the bull market in a way that could not be denied. She was early, but not wrong.

And if you had been following her model portfolio throughout this period, you'd probably be saying that it was hard to deviate from what the consensus thinking was, but it was easy to see her trades were working. Mish's trades (which proved to be a solution) were focused on commodity related trends: energy, agricultural, and precious metals.

That was the right call, and that's why her model portfolio has been up every year despite the fundamental side of the market is still bearish.

Some of Wall Street's best and brightest began ratcheting down their US GDP projections and company earnings forecasts. Two of the best, Mike Wilson, Chairman, Global Investment Committee of Morgan Stanley and Mike Hartnett, Bank of America's Chief Investment Strategist, have been warning of "inflation shock" and tough times ahead.

They both came out Friday morning (June 3) and warned investors not to chase the market. In their words, this was nothing more than a "bear market bounce." The S&P 500 proceeded to drop over 1.5%, and the Nasdaq tech-heavy index fell by 2.5%.

But it was the deeply troubling rhetoric of Elon Musk, CEO of Tesla, and Jamie Dimon, Chairman of JP Morgan, that echoed the negative sentiment from all types of business owners and economists this past week. Even the Treasury Secretary, Janet Yellen, came out to admit that she got the Inflation scenario wrong.

In recent polls, 90%+ of Americans said their biggest concern for the near future was the price of goods and energy. One of the most prevalent subjects covered by TV newscasters is the price increases of everything. Sad stories about people having to decide on whether to fill up their cars (to get them to work), or be able to buy food to eat are multiplying.

This as gasoline hit a new national average on Friday of $4.76 a gallon. That factors in lower prices in certain states. Many states, including Washington, California, Nevada, and others are seeing gasoline prices at well over $5.00 and in some cases, close to $7.00+ a gallon.

Due to Europe's decision to begin to boycott Russian oil this past week, per barrel prices rose yet again to new highs near $120 a barrel. Even with OPEC's pronunciation this week that it would begin to increase production, nothing is stopping oil and natural gas from continuing their weekly increases.

Our own Sector Plus and Global Macro investment strategies have greatly benefited from the energy thesis this year. Our readers have profited handsomely from oil (USO), natural gas (UNG), and diversified energy ETFs (ERX & XLE).

It is expected that the Federal Reserve will continue to aggressively hike interest rates. This negative inflation narrative received another dose of unpleasant news on Friday morning when the May employment announcement included more jobs created than expected.

Many economists were predicting that recent Fed action would soften the hot job market. The creation of 390,000 new jobs sent interest rates up 7 basis points and the realization that the Fed would need to remain aggressively hawkish. The lone bright spots were that hourly wage increases slowed a bit and consumer retailers hiring was down on the month, indicating that retailers are preparing for some demand destruction.

This was another dagger in the stock and bond markets. It stopped Thursday's jubilant stock market rally dead in its tracks. There was no follow through.

In recent articles, we have been warning that the market (S&P 500) is in a bearish phase and not to get overly enthusiastic about chasing a "corrective wave" up. Oversold stocks can get more oversold. The S&P 500 needs to clear the 50-day moving average (see the blue line in the chart below) to have a better chance at a sustained rally.

What Can You Do To Protect Your Portfolio?

These are ideas that we continue to suggest. Please review our writings to gain additional insight.

1. Do not chase markets.
2. Be patient. Cash can be king in an uncertain market
3. If you have a plan, stick to it. If you need a plan, you can contact us.
4. Do not be forced by a professional to get or stay invested.
5. Mix up your asset allocation with commodities, energy, and investment hedges.
6. Do something fun and take your mind off the turbulent and highly volatile markets.

Market Insights - Risk-On

• The New High/New Low ratio is still significantly improving for SPY. It looks to be having a relatively lackluster bounce for QQQ.
• Risk gauges are risk-on across the board.
• Small-caps (IWM) are improving against large-caps.
• Value stocks (VTV) broke down below both the 50- and 200-day moving averages and are now underperforming growth stocks (VUG) on a short-term basis.

Risk-Off

• Utilities (XLU) remain in a bull phase and continue to outperform the SPY, which is a primary risk-off indication.
• Despite the market rally off of lows, the last two weeks show more distribution than accumulation days across the 4 major indices.
• The most important sector this week is energy (+3%), exerting inflationary pressures on the market.
• The broader energy sector, including solar energy (TAN) and clean energy (PBW), was the clear market hotspot this week.
• The number of stocks above key moving averages retreated this week and is still working off of overbought readings on a short-term basis.
• US Treasury bonds (TLT) look vulnerable again, with a breakdown underneath the short-term bear flag pattern.
• Regional banks (KRE) looks to be the strongest member of Mish's Modern Family as it sits just below its 50-day moving average, indicating the potential for higher rates that would continue to benefit banks.
• Gold (GLD) held above its 200-day moving average, while oil has been making new long-term highs thanks to the outperformance of the global energy sector this week.

Neutral

• The key US indices all closed beneath their respective 50-day moving averages, but they did close above their shorter 10-day moving averages.
• The McClellan Oscillator for SPY is backing off after reaching one of its most overbought levels in over a year. It's rather dubious whether it will continue correcting to the downside, or if this is an indication of a bottom and major volume upthrust.
• Foreign equities (EEM & EFA) are outperforming US equities on a relative basis and look poised to breakout above their respective 50-day moving averages.
• Agriculture looks potentially toppy as it closed below its 50-day moving average in a weak warning phase, although the longer-term trend is still rising.
• We're watching the US dollar (UUP) and the euro (FXE) for major trend reversals come Monday, both seeing their respective 50-day moving averages acting as inflection points.