Why the war against deflation is coming to a close.

Last week we discussed a potential positive technical picture developing for the stock market.  We also noted that a resolution of that technical picture would result in some shifts in emphasis among stock sectors.  In particular, we would likely see a shift toward those groups and companies that would benefit from the reinflation of our economy.  Inflation has been exceedingly low for some time; in fact, our economy has been battling deflation.  We may have won the war against deflation and may soon have to deal with increasing price inflation.

Of course macro events can always waylay, or at least delay, underlying trends.  That probably happened last week with the events in Syria.  The U.S. indicated that it would punish the Syrian regime for using chemical weapons on its own citizens.  Fearing unknowable consequences, investors went to the sidelines and normal economic stock market influences were put aside.  However, now that the U.S. has modestly backed-off imminent action, those market forces may once again come to the fore.

Other market forces that we did not discuss last week are changes in international market trends.  The technical picture looks right for European stocks to outperform U.S. stocks for the immediate future.  Also, it appears that emerging markets have made an important bottom and may also begin a period of outperformance.  We are watching these trends very closely and have already made some moves to benefit, but will make even more if these trends gain force.

We do not rely on technical analysis for our decision making, but it is useful to confirm trends we see in our fundamental analysis.  This is one of those times when we see an alignment of both analytical approaches.