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Chart Advisor: Sign of Inflation

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Friday, February 19, 2021

1/ Bond yields surge, prices fall, and stocks weaken 

2/ Inflation expectations plus share buybacks lift DOW  

3/ Airline companies catch an updraft 

4/ The bottom line

1/ Bond yields surge, prices fall, and stocks weaken 

Bond funds have tumbled as the 10-year U.S. Treasury Note index (TNX), a benchmark for bond yields, has surged during the past few days. The negative correlation between these two indexes means that bond prices fall when rates rise. However, the current version of this dynamic has been rather dramatic and may signify the emergence of new concerns by investors.  

The chart below shows that the direction of TNX and iShares’ 20-year Treasury Note Index ETF (TLT) have moved strongly over the past 10 trading days (though in opposite directions as expected). Meanwhile, State Street’s S&P 500 Index ETF (SPY) has stalled into a tight trading range during this timeframe. It is possible that the next move could be a downward dip if investors don’t think that stocks can help them outpace inflation well enough.     

2/ Inflation Expectations Plus Share Buybacks Lift DOW  

It is unlikely that investors will remain doubtful about the value of investing in stocks for very long. At least if today’s price action in Dow Chemical shares (DOW) is any indication, investors are much more likely to aggressively seek stocks that can help them outpace inflation. After all, stocks in the Basic Materials Sector are nothing if not inflation sensitive

The chart below shows the Accumulation/Distribution indicator in the lower panel. This indicator tracks the value of shares bought compared with value of shares sold. This indicator is making new highs and trending higher, though the price did not make a new high today, despite the strongly higher close today. This is a bullish indication.  

The news on DOW today was that the company is attempting to raise one billion dollars from selling off certain assets in Germany. The rumor was that they would use some, or all, of that money in a share buyback program. It is noteworthy that investors would respond so intensely to such a rumor, and it gives an indication of just how desperate investors are to outpace inflation wherever they see the opportunity to do so.    

3/ Airline Companies Catch an Updraft 

Airline industry stocks such as Delta Air Lines (DAL) and Alaska Air Group (ALK) not only closed higher today, but have been on a multi-day swing higher. The news driving these stocks higher was that the Transportation Security Administration (TSA) said it would hire 6,000 workers to handle the increased flow of new passengers this summer.   

It seems that this bit of news has a lot of assumptions built into it before it could become a solid basis for an investment decision. But since prices surged higher on the news, it is logical to assume that either analysts and fund managers have taken all of that into account and revalued shares higher, or they are simply being driven by a modern version of John Maynard Keynes’ animal spirits. Either way, this is a bullish indicator—for now. 

4/ The Bottom Line 

Bond prices fell as interest rates rose. This multi-day move seems to have shaken stocks a bit, but it probably won’t last long. Investors are very eager to outpace inflation, as evidenced by the move in DOW shares and airline stocks today. 

Originally Published on February 19, 2021

     

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