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USEquityTechnicals,January15,2013

NJBucheleres

Ihaveincludedtwochartswithanalysisbelow.TheyarebothdoneontheSt.LouisFederal

Reserves(FRED)chartingservice,andbothareaugmentationsofmultipledatastreams.Iliketooverlaypopularandrelateddataindicesandfindextremeswithinthem.

UniversityofMichiganInflationExpectationsminusS&P500(blue)versustheS&P500(red)since1980

Asweseeabove,equitiespeakwheninflationexpectationsspike.Ashasbeendiscussed,I

believethatexpectationsarecontrarianindicators,andthischartillustratesthisconcept

case-and-point.Theyellowlineonthechartaboveisarbitraryinnominalvalue,butitis

importantinrelativevalue.Aswecansee,4ofthe5timesthattheInflationExpectations

minusS&P500hasreachedthisyellowlinelevel,ithasmarkedatop(someglobal,some

local)inequities.

LookfortheuptrendinexpectedinflationrelativetotheS&P500tobounceoffoftheyellow

supportlineandtraceoutasell-offinUSequities.

*Note:FREDdatalagsbyaboutonemonth;rightnowtheS&P500isat1,471.

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ConsumerPriceIndexminusS&P500(blue)versustheS&P500(green)since1980

Inthisglobalcentralbankingenvironmentthatwehavecometolovegripswith,thistypeof

meanreversion(accompaniedwithvolatilitycrushing)isatrendthatIdontseechanginguntilanexitstrategyfromglobalQEisimplemented(ieratesareallowedtorise).That

beingsaid,thepatternabovespeaksforitself.BecausetheFREDdatalagsbyamonthorso,

theselevelsaremoredramatictoday(iefollowthedottedlines)thanthedatashows.This

almostseemstooapparent,butIbelievethatthisreversionwillcometoaheadoncemore.

Globalcentralbankinghasgiventhefalseillusionthatsomehowthemarketcanreplacethe

economy.Thisregimeworksoutbecausequantitativeeasingraisesassetprices(second

chart),thoserisingassetpricesraiseindices,andhigherindexlevelstrickledownto

sentimentandexpectations(firstchart).Oncepricesandsentimentbubbleup,they

eventuallycrashdownagain,andbeforeweknowit,therealeconomyhasbeenleftbehind

andpricesarerightbackwheretheybegan.