Deflation Watch…..IMPORTANT STUFF

Much of the time what you see here is some of my rambling on the markets, colored with 42 years of experience.  To me most market days are of little significance, just pieces in the macro picture.  I do like to follow weekly charts for the big picture story.  Today’s information is about that “BIG PICTURE” . 

The growth of ETF’s has made it much easier for investors to measure the market, one can compare one ETF to another on the same scale.  For purposes today I am using ETF’s that tell an INFLATION / DEFLATION story. 

The two  relationships that to me are early indicators of changes in direction are: 1)  the DBC / SPY chart (AG Commodities versus the S&P 500) , and 2) the DBO / SPY chart (Oil versus the S&P 500). Both of these relationships topped out in the week of July 11th 2008 in the Macro Cycle, had a bounce starting in December 2008, and now starting in June 2009, have begun the next leg down.  What that means to me is that it appears Oil and Ag Commodities are going to be weaker than the stock market in the next phase.

The third indicator I follow is the crazy indicator, gold, and view that in the form of an ETF relationship chart GLD / SPY(Gold versus the S&P 500).  Both the Macro and short-term indicators topped out in the week of March 6th, 2009.  For me this indicates that all the talk about inflation is just that, talk.  Gold has been and will continue to lose to the stock market moving forward. 

Another ETF relationship I watch, kind of a backup indicator, is the TLT / SPY  chart (T-Bonds versus the S&P 500).  In watching for deflation one is looking for indications that T-Bonds are gaining on the stock market.  The big cycle started up on July 13, 2007, topped out in the week of March 9th, 2009, and now appears to be making a secondary bottom again.

And then there are two other ETF relationships that I watch for insight to details.

First, the  XLF / SPY chart (financial stocks versus the S&P 500) tells a little different story on deflation, it was early in the Macro Cycle, turned down on 2/16/07, started a bounce on March 6th, 2009 and still is trying to hang on.  It will probably function as a late indicator of the end of the bounce and in the end will no doubt be the biggest loser when the Macro Cycle ends sometime in the next three to four years.

Lastly, the FXI / SPY chart (China stocks versus the S&P 500) tells the story of the China / USA relationship and is in a sense the unfolding story of the dollar.  China ramped up over the past year to try to leap ahead of the reflation cycle.  When that reflation implodes, the dollar will soar.

11:35 AM CDT