Inflation Hedges Surge in Strength

Investors looked beyond financial stocks in the past week and the market experienced surges of strength in consumer discretionary stocks, and perhaps troubling signs of strength in materials and energy related stocks. For this analysis, we are looking at the Bullish Percent Index (BPI) from StockCharts.com. This indicator is calculated by dividing the number of stocks in a given group that are currently trading with Point and Figure buy signals, by the total number of stocks in that group.

While financial stocks became overbought a week ago, they got even more overbought in the past week. This demonstrates why it is important to view an overbought indicator as a warning sign rather than a sell signal. Until the financial sector BPI falls below 80% it should still be considered in an uptrend.

The biggest story in the numbers this week is the major increases in the BPIs of sectors that indicate price pressures may be building in the economy. Economic reports have been presenting a mixed picture for several weeks with some reports offering hope of a nascent recovery and others failing to confirm those expectations. The reports may be telling us that things won’t get much worse, but they also might not get much better. Action in stocks this week supports that hypothesis.

The surge in the BPI of the consumer discretionary sector shows that consumers may start spending again soon, which would be good for the economy. Material stocks and energy stocks, which also saw gains in the BPI, will do well in an inflationary environment, and this would be a negative for the economy. Many consumers remember that the record profits of oil companies coincided with $4 a gallon gasoline. Surging prices, a distinct possibility given the fact that Federal Reserve is printing money nearly as fast as the government of Zimbabwe, would sap consumer confidence.

source: Nesnah Associates Enterprises Limited

The rapid gains in strength of several sectors in the past week shows that investors want the market to go higher – in fact it seems as if they are almost afraid of being left behind. Financials remain an unlikely choice to lead a sustainable bull market. It might be a good time to add recent laggards to a portfolio in anticipation of the fact that an economic recovery will boost the fortunes of healthcare and consumer staple stocks. These stocks also serve as solid core investments in case the bear market resumes.