I am sure by now you and your family are feeling the effects of rising inflation.  It has manifested itself in just about every aspect of American life…rising food costs, building supplies, housing costs, energy and most of all, good ole’ bacon.  What is going on?

The truest definition of inflation is when demand outstrips supply.   Inflation is insidious and affects all parts of society but has no greater impact than on lower and middle class Americans, which for all intensive purposes these days is 90%+ of our society.  It is punitive certainly for lower class Americans who cannot afford to “pay up” for food and products, including gasoline.

This past week the Government posted its upcoming Social Security increase would be 5.9% the largest such payment increase in 40 plus years, but hardly a dent in the ability to keep up with rising cost of goods and services.

Copper prices shot up and are approaching new highs while lumber prices have rallied 50% in the past few weeks.  These are all disconcerting signs of steep price increases continuing

This reminds me very much of the 1970’s where I cut my teeth trading on the floor of the commodities markets in the World Trader Center. All commodities flew; from gas to sugar to coffee and even pork bellies all inflated in price like the current table below, and they didn’t let up for years.

Inflation was already simmering with interest rates close to 40-year lows before COVID hit. The Fed was struggling to taper, but backed off as equity markets could barely handle even the suggestion of higher rates. COVID was just the tipping point.

Now we struggle to unload cargo from China and seek out enough truck drivers to haul the goods (there is estimated to be a 100,000 plus shortage of truck drivers in the US) while containers full of goods sit on the docks for weeks.

The only real way to deal with the harmful effects of Inflation is for the Federal Reserve to raise interest rates and pump on the brakes of the economy to reduce demand with the hope that it will slow down price increases.

But this will most likely send us into a recession, hamper the growth of company earnings, and certainly send asset prices, including stocks, down and sometimes quickly.  The Fed first has to taper money supply (they have committed to doing that this fall) and then raise rates.  Several CEO’s of the largest banks in the US have already called on the Fed to begin raising rates to stop the harmful effects of Inflation.

At MarketGauge, we need to remain vigilant in our investment process as we know that “risk off” may be sooner than we think.  In the meantime, look for value and stay disciplined in your trading.

This Week’s Market Highlights

• Risk Gauges moved to 100% Risk-On
• 3 out of the 4 key indices are in bull phases, while (QQQ) is hitting resistance at its 50-day Moving Average (DMA)
• Except for (IWM), short-term momentum is still working off oversold levels and mean reverting
• However, on a weekly basis momentum according to price and Real Motion is still bullish for the 4 major indices
• Market internals improved, with the McClellan Oscillator for SPY starting to run a bit rich
• The Hindenburg Omen indicator on (SPY) backed off, confirming an improved Risk-On situation
• Market sentiment shows the number of stocks in the SPY above their 10-day Moving Average is at 82% and starting to run rich
• Volume patterns improved overall, with accumulation days doubling from last week
• Sector rotation with Consumer Staples (XLP) underperforming Consumer Discretionary (XLY) on the week, a Risk-On signal
• The economy is showing overall strength with Real Estate (IYR), Homebuilders (XHB), and Materials (XLB) all up over 3% on the week
• Basic Metals (DBB) and Alternative Energy led by Solar (TAN) rallied, with 10+% gains on the week
• Volatility (VXX) hit new lows for the year, another Risk-On confirmation
• The yield curve is flattening out a bit this week, showing increased pressure on the Fed to reduce the taper and potentially start raising rates
• Growth stocks (VUG) is on the verge of regaining leadership over Value stocks (VTV)
• Transportation (IYT) moved higher for the week, creating a new high for the first time since early July and is in a strong bullish phase with potentially more upside potential
• Established markets (EFA) lagged and hit resistance at the 50-DMA, while Emerging Markets (EEM) cleared its 50-DMA and is outperforming US Equities
• Copper (CPER) roared, indicating economic growth and inflationary pressure
• Gold (GLD) hit resistance at its 200-DMA before dropping back below its 50-DMA on Friday, back in a bear phase
• Oil (USO) continued its strong parabolic move

This Week’s CryptoPulse Highlights:

• Bitcoin (BITCOMP) crushed it this week as the coin flew through the major $60k resistance level and saw a Friday daily close at $61,700, the highest level since mid-April
• Ethereum (ETH-X) underperformed Bitcoin on the week, but still made crucial progress back towards the $4,000 resistance level, with a daily close at $3,830
• Stablecoin provider Tether (USDT-X) and it’s parent company Bitfinex received a $42.5 million fine from The Commodity Futures Trading Commission (CFTC). This is likely a political move, as the regulator continues to assert its authority in the US crypto industry over that of the SEC
• The biggest news this week is that the first ever Bitcoin Futures ETF is likely to be approved by the SEC, with Valkyrie, ProShares, and Invesco as the most likely applicants to be approved this coming Monday.