Why Higher Inflation Matters And Transportation Is Key

After a higher than anticipated CPI report, the major market averages traded much lower. August CPI came in increased by 20 basis points.

JNK-Daily Chart

Fed Futures are now pricing in a 20% chance of a 100-basis point hike and an 80% chance of a 75-basis point hike. Inflation has broadened in society and become more entrenched in the economy and will remain above 2% for some time.

It can be challenging to keep up with the stock market at the moment. However, one reliable tool, MarketGauge's "Modern Family" provides insight into the current macro picture.

One of the family members and the strongest now, "Trans" (IYT) helps provide the general assessment of the bond market.

Furthermore, junk bonds have been excellent at assessing risk on or off.

It’s important to look at where we are in terms of risk. Are we able to see further gains in the stock market, or is a pullback on the horizon? To answer this question, we need to look at bonds and yields as well

The chart above shows that junk bonds (JNK) are losing steam and retreating from its 50-day moving average. JNK is rolling over, yields are around 7% and investors are buying less risky debt.

Investors are not choosing higher spreads, but less risky bonds.

At this moment, one can take virtually no risk and receive 3.73% in 24 months and only lose inflation cost.

IYT-Daily Chart

IYT failed the 200-DMA and until the close, was holding the 50-DMA. Should we confirm the return of the bear phase, we can assume at this point, the economy cannot handle these aggressive rate hikes.

What is interesting and perhaps the best scenario besides JNK bonds holding June lows, is that IYT is outperforming the SPY.

Should JNK hold and IYT reclaim their 50-DMAs, perhaps the worst of the shock is behind us.

Nevertheless, should neither hold up and sell off further, we will take that as a reliable sell signal.

To learn more about how we invest profitably during these times, please reach out to Rob Quinn, our Chief Strategy Consultant, by clicking here.

ETF Summary

S&P 500 (SPY) Unconfirmed return to bear phase 389 1st support with additional support at 382 and resistance at 400

Russell 2000 (IWM) Unconfirmed return to bear phase 178 support and resistance 186.50

Dow (DIA) Unconfirmed return to bear phase Support at 310.90 (last week low) and resistance 315

Nasdaq (QQQ) Unconfirmed return to bear phase Support at 292 and resistance at 300

KRE (Regional Banks) Unconfirmed return to bear phase Support at 62 resistance at 63.25

SMH (Semiconductors) 198 support and resistance at 210

IYT (Transportation) Unconfirmed return to bear phase. 226.80 support and 233.50 resistance

IBB (Biotechnology) Unconfirmed return to bear phase 120.50 support and 124.10 resistance

XRT (Retail) Unconfirmed return to bear phase support at 61.70 and 64.50 is resistance