Weeks of selling pressure finally erupted yesterday, sending the Dow Jones up 1.4%, the S&P 500 up 1.8%, and the Nasdaq up 2.1%. Our own top stocks, meanwhile, more than doubled the broader indices. And that’s just a preview of how the next 12 months will play out on Wall Street.
Yes, there are lots of skeptics and critics out there. But we’ve read all their arguments. And they all hinge on one assumption that’s just plain wrong: Inflation will stay hot for a while.
Yesterday was proof of that. Commodity prices are collapsing. And nearly every leading inflation indicator implies that rates will collapse by more than half over the next few months. As they do, stocks will soar.
The technicals confirm as much. One breadth technical indicator – which flashed just last month and has a 100% track record of being right – suggests stocks will rise more than 20% over the next 12 months.
Yesterday wasn’t a fluke. Nor was the market’s summer rally. On the contrary, they are the start of a new bull market forming as inflation falls.
Here’s a deeper look.
Inflation Is Falling… Fast
All the bears these days have the same argument.
They believe inflation is going to stay hot, which will force the Fed to hike rates very rapidly and aggressively for a lot longer than anticipated. And in turn, that’s going to spark continued immense selling pressure in both bonds and stocks.
But that thesis hinges entirely on the idea that “inflation is going to stay hot.” That’s a faulty assumption being obliterated by recent price action.
Oil prices are down 40% from their June peak and are crashing to new cycle lows. Gas fuel prices are down 25% over that same stretch. Natural gas prices have collapsed 30% from their August peak. From their early 2022 peaks, copper prices are down 40%, aluminum prices are down 80%, and iron prices are down 35%. Wheat – one of the biggest commodities impacted by the Russia-Ukraine war – has seen its price decline by 50% since May.
Indeed, commodity prices are collapsing.
Why? Two reasons.
First, the supply side of the inflation equation isn’t as bad as feared. As it turns out, Russian wheat and oil aren’t coming offline. They’re being sold to China and India, and everyone else is just buying that wheat from China and India. In absolute terms, commodity supply has not decreased. Certain commodities are just playing a game of musical chairs.
Second, the demand side of the inflation equation is collapsing. The U.S., European, Asian, and Oceanian economies are all rapidly decelerating right now. That’s at the same time that the central banks across most of those regions are aggressively and rapidly raising interest rates. And that combination means economic demand across the globe is set for massive deceleration.
Massively decelerating demand is converging on a supply situation that isn’t as bad as feared, creating enormous price declines across the commodity world.
Such huge declines are leading to equally huge declines in manufacturing and services prices.
Every month, the Institute for Supply Management asks a bunch of manufacturing and services executives across the country what prices they are paying for certain goods. The index of those prices has been plummeting. That’s super important because that index tends to lead overall inflation rates in the U.S. economy by about three months.
Therefore, if ISM Manufacturing and Services prices are collapsing today, that means inflation rates should collapse over the next three months. Indeed, a quantitative analysis of the historical relationship between these two data series implies that inflation rates will halve over the next few months!
If inflation rates halve over the next six to 12 months, then stocks will soar over the next six to 12 months.
Just look at what happened the last time the U.S. economy dealt with runaway inflation in the 1970s. As soon as inflation peaked in late 1974, stocks bottomed at the exact same time. As inflation rates crashed from late 1974 to late ’76, stocks soared out of a bear market and into a new bull market.
We believe a similar relationship will develop between 2022 and ’24.
Inflation peaked in mid-2022. Stocks bottomed in mid-2022. Inflation rates will come crashing down over the next 12 to 24 months. As they do, stocks will soar into a new bull market.
The Perfect Bullish Breadth Indicator
Confirming the notion that we are in the midst of entering a new bull market is a unique breadth indicator with a 100% track record of calling big breakouts.
One of the most impressive things about the summer rally in stocks was its incredible breadth. Indeed, pretty much every stock partook in the rally. This incredible breadth trigged a rare stock market indicator. We went from incredibly oversold conditions (less than 10% of stocks trading above their 50-day moving averages) to incredibly overbought conditions (more than 90% of stocks trading above their 50-day moving averages) in just two months.
That’s pretty wild. In mid-June, less than 10% of stocks were trading above their short-term price trends. Two months later, more than 90% of stocks were trading above their short-term price trends.
That’s so wild, in fact, that it’s only happened six times before in the stock market’s history: 1988, 2009, 2011, 2016, 2019, and 2020.
Each time, stocks were higher three, six, and 12 months later, with average gains of 7%, 11%, and 23%, respectively.
The astute bear will point out that this time may be different because stocks are down about 7% since this signal was triggered.
But look more closely at the data. The fact that stocks have dropped in the month following this rare breadth indicator does not disprove it. In both 1988 and 2011, stocks dropped in the month following this breadth indicator being triggered. Still, in 1988, stocks were 7% higher a year later. In 2011, stocks were 13% higher a year later.
What we’re experiencing right now is par for the course. After such a terrific rally, it’s normal to take a breather. But the data strongly suggests that this selloff is, indeed, just a breather and nothing more sinister.
Regardless of where stocks go over the next month, we’re very confident in saying that stocks will rise significantly in six to 12 months.
The Final Word
There is a massive tug-of-war emerging on Wall Street between the bulls and the bears. Everyone has their talking points. Everyone has their data metrics and their charts.
But at the end of the day, there’s one thing pretty much everyone agrees on: As goes inflation, so goes the stock market. If inflation rips higher, stocks crash lower. If inflation falls, stocks soar.
To that end, the debate on Wall Street between bulls and bears is a debate on inflation. Which way will it go?
That’s the million-dollar question.
And here’s the million-dollar answer: lower – a lot lower.
That’s why stocks rallied big in June, July, and August. It’s why stocks popped big yesterday. And it’s why stocks will rally big over the next six to 12 months.
The problem of the year (inflation) is being solved. As that happens, we’ll enter a new bull market.
The time to put yourself in a money-making position from this new bull market is now.
And the best way to do that? Invest in unique breakout stocks that are technically primed for huge moves higher in a short amount of time.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.