Last week featured an updated look at the Personal Consumption Expenditures (PCE) inflation report. The Fed’s preferred inflation gauge is inflecting higher similar to other measures of inflation, and has accelerated for three months in a row. The year-over-year rate of change in the headline figure (orange line) and core measure (blue line) that strips out food and energy prices has been moving higher since September and remains above the Fed’s 2% inflation target as you can see below.
Sectors and asset classes sensitive to rising inflation are potentially setting up major breakouts. The chart below shows the iShares S&P GSCI Commodity-Indexed Trust ETF (GSG). After recently testing the high-end of a range stretching back over two years, momentum became extended and GSG is pulling back. But note the 50-day moving average (MA — black line) is crossing above the 200-day (green line), while the MACD is seeing a bullish reset above the zero line. The small retracement off a key resistance level could setup a major breakout over the $23 level.
Another commodity sensitive to inflation is building on a major breakout that started at the end of 2023. Gold prices peaked just over the $2,000 per ounce level in 2020, and tested that level on three occasions before breaking out in December 2023. After a three month consolidation, gold prices are now hitting a new record high at over $2,800 per ounce. But another major breakout could be in the making. Adjusted for the money supply, gold prices are still about 80% below the peak. But that ratio is testing trendline resistance that goes back over 40 years in the chart below.
A commodity chart could be sending an important signal about the state of the global economy. The chart below shows the Invesco DB Base Metals Fund (DBB). The fund holds an approximate equal weight across copper, zinc, and aluminum futures. Those metals are utilized in a variety of industrial and construction end markets, which makes their prices sensitive to economic developments. You can see that DBB is creating a symmetrical triangle pattern since peaking last May. Triangles are typically continuation patterns, which means they resolve in the direction preceding the pattern. You would expect a breakout higher in this case, which could target the prior highs near $24.
Despite the recent uptick in market volatility, high yield bonds are also sending a positive message about the economic outlook. Total return indexes are hitting fresh all-time highs ahead of the stock market indexes. High yield spreads are also hovering near historic lows. Spreads represent the level of additional compensation investors demand over a safer security like Treasury bonds. When that spread widens, it shows investors becoming more concerned about the economic outlook by demanding more compensation to lend to risky companies. But low spreads reflect a positive outlook, with spreads currently hovering near historic lows in the chart below.
Better performance in the average stock during January is triggering a breadth thrust on the S&P 500. The chart below looks at a ratio of the 10-day cumulative sum of advancing stocks relative to declining issues. That ratio jumped above 2 at the end of January, which triggered the thrust signal. When triggered, the S&P 500 historically experiences a rally over the next two months 90% of the time, while the equal-weight version of the S&P typically outperforms as well.
Despite volatility around AI stocks and tariff headlines during the final week of January, the month still finished with a gain of 2.7%. During previous years where January experienced a 2% or higher gain, the calendar year finished higher 88% of the time with a median gain of 19.3%. The gains also bode well for the January barometer, which refers to the historical tendency for the S&P’s calendar year performance to directionally match January’s returns. The chart below plots the S&P 500’s path since 1950 based on January’s performance and if the month finishes higher or lower.
If the S&P 500 is going to follow through on the historical implications of a strong January, it’ll have to contend with a poor incoming period of seasonality first. Going back to 1945, February is one of the worst calendar months for S&P 500 average returns. It has a slight negative return since 1928, and is the second worst month of the year after September. But historically, February is a tale of two halves. The first half tends to be bullish with rising price levels, which are then given back during the second half.
