Should Stock Markets Fear Inflation or Deflation?

How about both.

By Elliott Wave International

You can't go ten minutes on financial media these days without coming across a reference to inflation. That is, consumer price inflation to be more exact -- the measurement of changes in the prices of consumer goods and services that the entire world has been hoodwinked by central banks into thinking is the definition of inflation. The proper definition of inflation is the expansion of money and credit in an economy. On that definition, most major economies have been experiencing high inflation for decades.

Sigh, nevertheless, the focus for the markets at this moment is on a potential rise in consumer price inflation. The general underlying narrative from conventional analysts is that this is a good thing for markets because it is preferable to consumer price deflation. But is it?

Looking at the U.S. as an example, the chart below shows the annual percentage change in the stock market versus the annual percentage change in consumer prices. We can see that when consumer price inflation is accelerating, it has often coincided with periods of stock market declines, not advances. This was especially the case in the "stagflation" of the early-to-mid 1970s as well as from 1987 to 1988 (encompassing the famous stock market crash).

The correlation coefficient between the two series since 1972 is actually negative, coming in at -0.13. In other words, there has been no discernible relationship between the two series and, whatever relationship does exist, has one going up when the other is going down. Interestingly, the correlation coefficient from 2008 and the onset of the Great Monetary Delusion (sorry, quantitative easing, or QE) comes in at a positive 0.22. Although that positive coefficient is in support of the "higher CPI is good" brigade (aka almost everyone), it is still way too low for any relationship to be said to exist from a statistical point of view.

In any case, there already HAS been high price inflation coinciding with the fastest rate of monetary inflation in history. That price inflation has been asset price inflation, with the U.S. stock market currently clipping along at a 32% annual rate!

In conclusion, therefore, we should not automatically expect higher levels of consumer price inflation to coincide with a healthy stock market (and therefore economy). In fact, historical evidence suggests that it might be worse for the markets than consumer price deflation.

Are you prepared for a deflationary depression?

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This article was syndicated by Elliott Wave International and was originally published under the headline Should Stock Markets Fear Inflation or Deflation?. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

U.S. Stocks: Here's Evidence of a "Nearly Unprecedented Acceptance of Risk"

U.S. Stocks: Here's Evidence of a "Nearly Unprecedented Acceptance of Risk"
Penny stocks fever has reached "the highest level since the first three months of 2000"

By Elliott Wave International

Penny stocks tend to be highly illiquid. In other words, it's difficult to buy and sell them at favorable prices.

Even so, the lure of low-priced shares is hard for many market participants to resist, especially the novices -- like in 2000, when penny stock trading had reached a fever pitch.

Well, just about the same thing has been going on this year. Here's a Jan. 20 Reuters headline:

Analysis: A 'buy' is just a tap away: stock market dabblers drive trading boom into 2021

Our March Elliott Wave Financial Forecast offered its perspective with this chart and commentary:

Total Penny Stock Dollar Volume hit $72 billion in January, the highest level since the first three months of 2000, when the dot-com mania peaked. Other than those three months, when penny-stock dollar volume averaged a whopping $155 billion, the value of shares traded in January 2021 was the highest. This suggests a nearly unprecedented acceptance of risk. ... This chart shows the average daily trading volume in penny stocks.

In a Feb. 16 Bloomberg article headlined "Penny Stock Craze at Boiling Point ...," a portfolio manager is quoted:

"It is very markedly similar to what we saw in 1999 with these day traders and novice investors coming in and treating the market as a get-rich-quick type of scheme, and of course that didn't end too well 20 years ago."

Indeed, Elliott wave analysis is revealing a lot about what's ahead for the stock market here in 2021.

As the Wall Street classic book, Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter, says:

[T]he Wave Principle often indicates in advance the relative magnitude of the next period of market progress or regress.

Every market participant -- whether novice or professional -- should know the Wave Principle's current market message.

If you would like to dig deeper into the Wave Principle, you can read the online version of Elliott Wave Principle: Key to Market Behavior, 100% free.

The only requirement for free access to the book is a Club EWI membership. Club EWI is the world's largest Elliott wave educational community with approximately 350,000 worldwide members and is free to join. Club EWI members enjoy free access to an abundance of Elliott wave resources on financial markets, trading and investing.

Let's wrap up with another quote from Elliott Wave Principle: Key to Market Behavior:

[R.N.] Elliott recognized that not news, but something else forms the patterns evident in the market. Generally speaking, the important analytical question is not the news per se, but the importance the market places or appears to place on the news.

Learn more about the Wave Principle and how you can apply this "law of nature" to your analysis of financial markets by following this link: Elliott Wave Principle: Key to Market Behavior -- free and unlimited access.

This article was syndicated by Elliott Wave International and was originally published under the headline U.S. Stocks: Here's Evidence of a "Nearly Unprecedented Acceptance of Risk". EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

What the "Sudden, Dramatic" Surge in Googling "Inflation" Tells You

It likely "typifies the end of an old economic trend and the beginning of a new one"

By Elliott Wave International

In the news, you hear that the big monetary fear these days is the prospect for a jump in inflation.

Here are some headlines since the start of the year:

• Inflation Is Coming. That Might Even Be a Problem. (Bloomberg, Jan. 13)
• Inflation concerns put Biden, Fed on defensive (TheHill.com, Feb. 23)
• Stocks tumble as Powell signals inflation is ahead (CNN Business, March 5)

However, keep in mind that similar inflation worries were pervasive a decade ago, when the U.S. Federal Reserve Bank was implementing its quantitative easing programs (QE1, QE2 -- these terms probably ring a bell) and just about every year since. Even so, runaway inflation never took hold. Why?

Here's a perspective you won't find anywhere else, from the just-published March Global Market Perspective, a monthly publication from Elliott Wave International which provides analysis of 50-plus worldwide markets:

The number of articles containing the word deflation has been stuck at zero for three out of the past five months, while inflation stories have steadily increased. This kind of contrary sentiment precisely typifies the end of an old economic trend and the beginning of a new one. In fact, the financial media's preoccupation with rising prices is nearly identical to that of January 2012, when GMP definitively stated: "The inflation panic is out of whack with prices." Back then, a similar inflation scare had taken hold, as the ... CRB index of core commodity prices completed a two-thirds retracement of its sell-off from June 2008 to February 2009.

And, during most of 2020 going into 2021, commodity prices have also risen.

As a March 2 NBC News headline says:

The price of food and gas is creeping higher -- and will stay that way for a while

Financial history shows that a rise in stock market prices is generally followed by an expanding economy. So, the current uptick in inflation is not surprising. Of course, that certainly doesn't mean that this uptick will last indefinitely.

Indeed, the chart pattern of the CRB Index of core commodity prices (which our March Global Market Perspective analyzes and explains) shows why a trip to the grocery store or filling up your vehicle's gas tank may get cheaper sooner than many observers expect.

Indeed, it appears that the next big monetary will be deflation -- not inflation.

As Elliott Wave International's special free report "What You Need to Know Now About Protecting Yourself from Deflation" says:

The psychological aspect of deflation and depression cannot be overstated. When the trend of social mood changes from optimism to pessimism, creditors, debtors, investors, producers and consumers all change their primary orientation from expansion to conservation. As creditors become more conservative, they slow their lending. As debtors and potential debtors become more conservative, they borrow less or not at all. As investors become more conservative, they commit less money to debt investments. As producers become more conservative, they reduce expansion plans. As consumers become more conservative, they save more and spend less. These behaviors reduce the "velocity" of money, i.e., the speed with which it circulates to make purchases, thus putting downside pressure on prices. The psychological change reverses the former trend.

Protect your wealth and take steps to get financially safe before the next monetary event becomes obvious to the crowd.

You can get more insights into preparing for what relatively few expect by reading the entire special free report.

Just follow this link: What You Need to Know Now About Protecting Yourself from Deflation -- free access.

This article was syndicated by Elliott Wave International and was originally published under the headline What the "Sudden, Dramatic" Surge in Googling "Inflation" Tells You. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Oat Prices AND the Truth Behind the "White Gold" Rush

Oat futures' recent surge to 7-year highs wasn't caused by the oat milk craze; think "market psychology" instead

By Elliott Wave International

Generally speaking, the idea of oats is about as exciting as, well, a bowl of steel cut oatmeal.

But this chart of oat futures shows why this ordinarily ordinary grain has stolen the commodity spotlight. For starters, February 2021 saw oat prices soar to their highest level in 7 years.

As for what's behind this newfound dev-oat-tion -- mainstream experts like these below cite the craze for alternative milk products and oat milk specifically. 

"Oat Milk is Everywhere.... In fact, oat milk is the second most popular plant milk now, right behind almond milk, racking up over $249 million in sales last year." (Feb. 9 Today.com)

"Industry Sewing Seeds as Oat Milk Popularity Rises." (Feb. 4 RNZ)

For some perspective, fever for the world's most popular oat milk producer Oatly is so hot it was featured in this year's Super Bowl ad lineup in a still talked about spot featuring the company's CEO, sitting in a field of oats behind a single keyboard awkwardly singing "Wow No Cow!" over and over for 30 seconds! The spot became the butt of jokes across the globe and was dubbed the "Worst Superbowl Ad Ever" by Australia's news.com.au:

Speaking of Wow Holy Cow! Oatly also announced in February its plans to go public in the U.S. Thanks to investments in the company by famous celebrities like Oprah Winfrey, Natalie Portman and Jay-Z, its IPO is estimated to be worth between $5 and $10 billion.

Ergo, the oat-milk craze caused the late 2020 rally in oat futures to 7-year highs -- right?

Not exactly. We believe this line of thinking is a bit -- well -- lact-oat intolerant of the facts. See, the oat bloat trend is not a new phenomenon. For those following these trends for more than a hot minute, there was the summer of 2018, when a shortage on oat milk prompted news sites across the country to riff satirical about how hip cities like Brooklyn, NY would survive the alt-dairy deficit. See this August 15, 2018 Guardian headline, for example:

In January 2019, the Guardian coined the term "white gold" for oats amidst the mania for alternative milk products

In September 2020, oat milk was crowned #2 plant-based dairy alternative in the world.

In February 2020, many experts warned that the ever-expanding "oat bubble was about to burst" (Feb. 28, 2020 Bloomberg)

And, in June-July 2020, the star-studded line to board the Oatly bandwagon began to form with the likes of Oprah Winfrey and Blackstone Group. 

Yet -- as you can see on the chart of oat futures below, the consistent craze for oat products during this period did not materialize as soaring prices, but rather as a down-up-down holding pattern that didn't end until late August 2020.

In late August, the soaring commercial demand for oat products didn't change; however, the slacking trend in oat prices did -- from down to way UP! The question is, was there a way to anticipate the latter?

Yes. In our September 11, 2020 Daily Commodity Junctures, we presented the oat chart below, which identified the August low as the end of a three-wave correction and start of a strong advance:

From there, oat prices soared into the $3/bushel level. In the December 4 Daily Commodity Junctures, we revisited the grain to address its upside potential. Our chart extended its up arrow into the $3.75 levels of 2014, seen here:

And from there, oat futures rallied to the upside target projected by Daily Commodity Junctures some two months earlier.

At the end of the day, there will always be a perfect reason in the news to explain market action --- after the fact. For traders and investor, however, the goal is to arrive at those turns in advance.

Here, our Commodity Junctures Service keeps you in front of high-confident setups in the world's leading markets in grain, livestock, meat, softs, and more. See below to read the latest forecasts now.

Commodity Opportunities Abound: We'll Drink to That

Whether you like oat milk or not, everyone likes the taste of anticipating market turns -- before they become front page news!

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This article was syndicated by Elliott Wave International and was originally published under the headline Oat Prices AND the Truth Behind the "White Gold" Rush. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

U.S. Stocks: Here's a Big Sign That "Sentiment Cannot Get Much More Extreme"

The stock exposure of the most bearish active investment managers is revealing

By Elliott Wave International

Relatively few investors want to bet against the stock market rally.

As a Feb. 18 financial article says (CNBC):

Short interest in the market has fallen to near-record lows.

Indeed, bullish sentiment is so extreme that even the most bearish among a group of professionals are behaving bullishly.

This chart and commentary from the February Elliott Wave Financial Forecast, a monthly publication which provides analysis of major U.S. financial markets, provide the details:

The chart shows that on a 10-week basis, the National Association of Active Investment Managers Exposure Index jumped above 100 in January, a new record extreme. Remarkably, even the most bearish NAAIM managers were 75% net-long equities. When even the bears are bullish, sentiment cannot get much more extreme.

A big reason why sentiment extremes are noteworthy is that they convey that there are relatively few market participants left to buy (or, in the case of a bear market, left to sell). Put another way, imagine almost every passenger crowded into one end of a boat. It won't be too long before they're all wet.

Of course, there are some serious market bears out there.

On Jan. 24, a CNBC headline reflected the warning of a well-known investor:

Stocks will fall at least 30% in a drawn-out bear market ...

That investor had cited "business unfriendly policies" out of Washington as one of the main reasons for his bearish forecast.

Time will tell if that market prediction will play out.

However, do realize that the waves of investor psychology are not dependent upon "fundamentals" such as Washington's business policies (or any other news). Just think, for example, that the current occupant of the White House was the U.S. Vice President from 2009 into 2017, the years when the stock market had almost tripled.

Indeed, Elliott wave analysis focuses on the market itself.

As Frost & Prechter wrote in the Wall Street classic book, Elliott Wave Principle: Key to Market Behavior:

The Wave Principle is governed by man's social nature, and since he has such a nature, its expression generates forms. As the forms are repetitive, they have predictive value.

Sometimes the market appears to reflect outside conditions and events, but at other times it is entirely detached from what most people assume are causal conditions. The reason is that the market has a law of its own.

You can delve into the details of this "law" of the market by reading the entirety of Elliott Wave Principle: Key to Market Behavior -- 100% free.

All that's required for free access to the online version of this Wall Street classic is a Club EWI membership. Club EWI is the world's largest Elliott wave educational community (approximately 350,000 members) and is free to join.

Simply follow this link to get started: Elliott Wave Principle: Key to Market Behavior -- free and instant access.

This article was syndicated by Elliott Wave International and was originally published under the headline U.S. Stocks: Here's a Big Sign That "Sentiment Cannot Get Much More Extreme". EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.