Inflation Rally Keeps Soaring

Discussion in 'Trading' started by inthemoneystock, Nov 4, 2010.

  1. The stock market is much like a pendulum that swings to extremes. It seems to get overdone to the downside and then when it rallies it gets overdone to the upside. At this time the stock market has staged a huge rally since August 27th, 2010 when Federal Reserve Bank Chairman announced that they would do another round of money printing or as it is called quantitative easing part two. The Dow Jones Industrial Average has climbed higher by 14.0 percent since late August. This is a big move for the year let alone for two months.

    The bulls on the financial business channels are coming out of the woodwork in droves. Every mutual fund and hedge fund manager is doing their best to persuade and lure the public back into market. We know that the public has not been in the stock market because the volume in this market rally has been extremely light. Historically, stock markets that trade higher on light volume and sell off on heavy volume are not healthy stock markets. Often this type of rally is usually manufactured or is artificial. This rally has admittedly been artificially induced as the Federal Reserve dilutes the U.S. Dollar Index almost on a daily basis. Today the U.S. Dollar Index declined to a new multi-month low and the Dow Jones Industrial Average made a new high for the year breaking above the April 2010 high.

    Clearly this rally comes at a price. The price is higher commodity costs. Today crude oil is trading over $86.00 a barrel. Gasoline is trading at a new multi-month high. Just look at a chart of the United States Gasoline Fund (NYSE:UGA). Unfortunately, this is a direct tax on the U.S. consumer. People will soon need to use heating oil as the winter approaches. These are just more added expenses to the U.S. consumer. Other commodities such as cotton have made new highs today. Just look at a chart of the iPath Dow Jones Cotton ETF (NYSE:BAL). This chart has increased by over 80.0 percent since mid-July. That is certainly inflation.

    The Federal Reserve Bank and the U.S. government reports will usually exclude food and energy when they measure inflation. However, they cannot say that cotton is food or energy and this commodity is certainly inflated. Inflation is here and it is coming in a major way as long as the Federal Reserve continues to devalue the U.S. Dollar Index. This is exactly what gold has been telling us as it trades at all time highs. At some point this will become a negative for the stock market and the U.S. consumer. When this happens these artificial gains will be wiped away very quickly.