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As the market settles into the Fed’s new round of monetary stimulus, I’ve been warning that a return of inflation cannot be ruled out in the near future.

Last week, I noted how the energy sector (XLE) perked up and claimed the one-week leadership position in the sector performance rankings.

But this week, there’s another new leader in the sector performance rankings. And guess what? It’s another inflationary sector. 

Check this out, because the Fed continues to play a dangerous game, and we need to be ready… 

More Fodder for Higher Prices

The new one-week sector leader is basic materials (XLB). This is another sector that makes up part of what I like to call the “inflation trade”. The others include energy, industrials, and sometimes, even consumer staples.

This makes it two weeks in a row now that we’ve had an inflation-related sector gather momentum. Note the timing of this signal from markets too - we just had a lower-than-expected PCE report last week, so now the crowd is believing more than inflation is in the rearview mirror.

This is why I prefer to focus on price action above all else - because markets are forward looking. Economic data is backward looking and only confirms what the market is saying currently in hindsight.

The other notable update in the Tale of the Tape is consumer discretionary (XLY) capturing the 30-day leadership position. Simply put, this is a very bullish development.

Remember that consumption accounts for roughly 70% of U.S. GDP. In other words, consumers drive the U.S. economy. With stock prices at all-time highs (save for the Nasdaq), the wealth effect is becoming an important factor in the inflationary equation again. Basically, people spend more when they feel wealthier.

When people spend more, prices rise. Higher interest rates incentivize investment over consumption, but now we’re heading back into an environment where borrowing and spending is incentivized again. I think we’re in the early-innings of seeing this inflation trade make a comeback.

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