Given how difficult it remains discerning between disinflation and stagflation, Friday’s economic status and price action did little to clarify definitively.
To sum up:
Disinflation or stagflation.
Evidence of both right now and can really go either way.
Evidence for stagflation-not seen since the 1970s
- Recent stats like GDP PCE Trade deficit Housing and Labor market show stagnation
- Inflation rose in core PCE while spending and wages fell
- Oil the X factor in that a price shock could seal the fate-energy in high demand-thus far above the key $64 level
- Silver, copper, lumber, aluminum, platinum, cattle all higher in price
- Fed-and tariffs-what impact will they see on inflation-rate cut X factor
- The declining dollar
- Retail (consumer) and small caps not keeping up with growth
Evidence for disinflation-1980s great example Volcker
- NASDAQ and growth stocks on the highs
- Food commodities cheap
- Oil as X factor can also drop plus natgas super cheap
- The Fed lowers rates convinced that prices have stopped rising.
- Consumer confidence not great but not that bad
- Transportation sector could be breaking out (Key ETFs improving)
- Labor market decline with AI may not reflect traditional type of job weakness
- Long bonds (TLT) rallies and yields drop
So, what does the Family have to say about this debate?
Right now, they seem to lean more towards disinflation despite the evidence that inflation could be picking up.
However, not everyone is as convinced as our wonder woman sister semiconductors.
Looking closer at the Semiconductors Sector ETF (NASDAQ: SMH), we can see that it cleared the January 6-month calendar range.
Note the July calendar range from 2024 (circled on the left of the page). That shows a potential resistance level coming in soon around 283 or right around the old highs from 2024.
Furthermore, the 50 and 200-DMA moving averages have yet to create a golden cross, while in Real Motion (momentum) that has already happened (also circled).
On the Leadership indicator, SMH might have peaked in performance against the benchmark.
Bottom line, our leader must now clear all time highs to continue to show signs of strength superseded by signs of stagflation.
As for our laggards, Retail and Small Caps,
The Retail Sector ETF (NYSEARCA: XRT) on the weekly chart looks ok. XRT sits above the 50-week moving average but below major resistance at 80.
On the Daily chart, we can easily see the difference between SMH and the consumer sector.
XRT is barely trading above the January 6-month calendar range low.
XRT is grossly underperforming the benchmark.
Momentum is the best thing going for this sector in that the red dots are above the 200-DMA while the price remains below.
Does the Retail Sector’s fate rest on SMH continue to run?
Yes. And add to that, the fate of oil prices and interest rates…more stag versus dis debate factors.
Before we look at the Russell 2000 ETF (IWM), a quick note about IYT, KRE and IBB.
Transportation (IYT) finally cleared the 50-week moving average. Now, it must stay above to prove to the rest of the Family it leans towards disinflation and higher equity prices.
Regional Banks (KRE) is so far behind the big banks.
The catalyst for KRE to believe in higher prices for this sector is tied to yields remaining softer so that folks in the rural areas are incentivized to borrow and spend.
Biotech (IBB), has looked rangebound for some time.
Over 130, we could see that getting more interesting.
The key takeaway is that IBB is both cyclical and non-cyclical in nature so the direction of inflation might not be a huge concern.
Finally, IWM peeked its head over the 50-WMA this past week. Good sign if holds.
On the Daily chart, IWM has not been above the 200-DMA or the calendar range low since February 2025, until now.
Friday, IWM cleared both marginally and now needs the classic 2nd day confirmation, which we hope to see on Monday. Note-at time of writing IWM was teetering hence needs at least one day close over the 200-DMA let alone two.
IWM is on par with the benchmark in leadership.
Real Motion shows a slightly bearish divergence with the red dots still below the 200-DMA in momentum.
Trading Plan
To see more upside:
- SMH must clear ATHs
- XRT must do more to convince us that consumers are less worried about economic slowdowns and higher inflation
- Transportation also must stay in the game
- IWM or small caps, must confirm and show us that the US reshoring and tariff objectives are being met with optimism.
That’s how the Family will ultimately resolve the debate between stagflation and disinflation. Then we can go from there.
Twitter: @marketminute
The author may have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not represent the views or opinions of any other person or entity.
