Wouldn't it be great if a simple number told you whether it was safe to bet on the market going higher?
Crossing Wall Street posted a chart that suggests the stock market does very well when the monthly inflation rate is under an annualized rate of 5.3%. Conversely, the market has done poorly in months when inflation is above that 5.3% annualized level. The chart shows the the monthly return above and below that level of inflation.
The data goes back to 1871; and it is surprising how well this relationship has held up over 140 years. During this period, monthly inflation has been above the 5.3% annualized level about one-third of the time.
Historically, when inflation was below 5.3%, the stock market has had an annualized after-inflation gain of 9.59%. And when inflation was above 5.3%, then the stock market has had an annualized loss of 8.15%.
Did Inflation Cause Returns to Change?
Computers are great at finding the optimal point for a system to trade based on historical data. Technical traders call this "curve-fitting", and have learned to be wary of coincident variables being confused as causal variables. That is a fancy way of saying that the relationship between inflation levels and stock market returns might be a great way to "describe" what happened; however, it doesn't prove that the inflation level "caused" the returns to go up or down. It also doesn't prove that inflation didn't cause the returns.
Nonetheless, 140 years is a long time sample … and inflation rates affect people reasonably uniformly … and the stock market can be looked at as collective measure of the fear and greed of the population. So, using the inflation rate as a trading filter seems to be a reasonable idea worthy of further testing. What do you think?
With many market watchers expecting the inflation rate to rise, this is something to consider.
Wouldn't it be great if a simple number told you whether it was safe to bet on the market going higher?
Crossing Wall Street posted a chart that suggests the stock market does very well when the monthly inflation rate is under an annualized rate of 5.3%. Conversely, the market has done poorly in months when inflation is above that 5.3% annualized level. The chart shows the the monthly return above and below that level of inflation.
The data goes back to 1871; and it is surprising how well this relationship has held up over 140 years. During this period, monthly inflation has been above the 5.3% annualized level about one-third of the time.
Historically, when inflation was below 5.3%, the stock market has had an annualized after-inflation gain of 9.59%. And when inflation was above 5.3%, then the stock market has had an annualized loss of 8.15%.
Did Inflation Cause Returns to Change?
Computers are great at finding the optimal point for a system to trade based on historical data. Technical traders call this "curve-fitting", and have learned to be wary of coincident variables being confused as causal variables. That is a fancy way of saying that the relationship between inflation levels and stock market returns might be a great way to "describe" what happened; however, it doesn't prove that the inflation level "caused" the returns to go up or down. It also doesn't prove that inflation didn't cause the returns.
Nonetheless, 140 years is a long time sample … and inflation rates affect people reasonably uniformly … and the stock market can be looked at as collective measure of the fear and greed of the population. So, using the inflation rate as a trading filter seems to be a reasonable idea worthy of further testing. What do you think?
With many market watchers expecting the inflation rate to rise, this is something to consider.
This playful dog doesn't understand why the statue won't throw the stick, but it keeps trying. It reminds me of the games the market is playing to entice someone to play.
The Markets Are Testing New Highs.
While the S&P 500 is still below its high from October 2007, that NASDAQ Composite flirted inches from its highest close since December 12, 2000.
So, Are You Bullish?
We hear a lot about how investors are overly optimistic … but a look at the latest numbers from AAII shows that bullish sentiment has dropped to under 31%. Again, we are near highs. That isn't overly bullish; frankly, it seems a little strange.
Normally, I would take the lack of bullishness as a contrarian indicator (meaning crowds are often wrong at turning points … so the lack of bulls would indicate a push higher was likely). However, I'm starting to think that there is little "real" investor capital at risk in the U.S. Equity markets right now.
When the real money wants to play, I'm not sure it will like the game.
This playful dog doesn't understand why the statue won't throw the stick, but it keeps trying. It reminds me of the games the market is playing to entice someone to play.
The Markets Are Testing New Highs.
While the S&P 500 is still below its high from October 2007, that NASDAQ Composite flirted inches from its highest close since December 12, 2000.
So, Are You Bullish?
We hear a lot about how investors are overly optimistic … but a look at the latest numbers from AAII shows that bullish sentiment has dropped to under 31%. Again, we are near highs. That isn't overly bullish; frankly, it seems a little strange.
Normally, I would take the lack of bullishness as a contrarian indicator (meaning crowds are often wrong at turning points … so the lack of bulls would indicate a push higher was likely). However, I'm starting to think that there is little "real" investor capital at risk in the U.S. Equity markets right now.
When the real money wants to play, I'm not sure it will like the game.
Recently, it has seemed like the market was looking for a reason to go up. Bad news was taken as a buying opportunity.
There was a change in market sentiment last week. The market finally found reasons to sell-off.
The move down was relatively minor and quite orderly. The S&P 500 is sitting comfortably in a support zone. The following chart shows that the move down did not come with panic selling and volume remained light.
The move back to support burned-off some of the excess exuberance. So, on the next push down, let's see if sellers get another bear trap sprung on them with a pop higher.
As I've said before, recently, if selling opportunities don't tempt sellers … Then the market will simply get pushed higher again.
Remember, a trend is in force until it's reversed. The broad equity indices are still behaving remarkably well. It could be a meaningful sign, or it could simply be a sign that there's a lot of money on the sidelines or in other markets.
Recently, it has seemed like the market was looking for a reason to go up. Bad news was taken as a buying opportunity.
There was a change in market sentiment last week. The market finally found reasons to sell-off.
The move down was relatively minor and quite orderly. The S&P 500 is sitting comfortably in a support zone. The following chart shows that the move down did not come with panic selling and volume remained light.
The move back to support burned-off some of the excess exuberance. So, on the next push down, let's see if sellers get another bear trap sprung on them with a pop higher.
As I've said before, recently, if selling opportunities don't tempt sellers … Then the market will simply get pushed higher again.
Remember, a trend is in force until it's reversed. The broad equity indices are still behaving remarkably well. It could be a meaningful sign, or it could simply be a sign that there's a lot of money on the sidelines or in other markets.
