Market Observations, Deflation Fears and an ARTAIS Update

Last week, the S&P 500 took a quick dive down toward the 50-day moving average as investors became worried about continued poor economic data. While some investors are quick to point to the Boston Marathon attack as the reason for the decline, there was in fact a large decline in the market before the tragedy in Boston occurred.

After declining last week, the market has bounced as traders and investors are hopeful that the market can remain above its 50-day moving average:

If the S&P 500 50-day moving average was breached,  I would expect a larger decline. Typically a breach of the 50-day has led to a test of the 200-day moving average:

Flight To Bonds Continues

Bonds are back and may be an early signal that the US stock market will be heading lower. After a multi-month downtrend, money is moving back into US bonds. Remember -- US bonds are considered by many to be a safe haven asset, and investors typically move money out of stocks and into bonds during periods of rising volatility.

The US dollar is rising once again, after a dip caused by Japan's new massive monetary program. (The US dollar is viewed as a safe haven for currency traders who don't want to be exposed to Europe's ongoing problems.)

Deflation?

What is really starting to interest me is the continued drop in commodity prices. This may be an indication that the futures markets are confirming data from the Bureau of Labor and Statistics that we are still in a down-trending inflationary period, and may be nearing a period of deflation.

This is an area to keep a close eye on. Last month's CPI number caused great concern among Fed board members that inflation was starting to rise and may spike in the near future. Instead, it seems just the opposite is occurring and that last month's data was an anomaly.

Friday's GDP report will be closely watched to see if there is an indication of slowdown, especially now that sequestration cuts are starting and the rise in payroll tax has had time to settle in.

ARTAIS Update

The ARTAIS model has been slowly rotating out of US equities this year. Last week, I removed our position in the the energy sector, as a potential slowdown in the US economy will have a negative impact on energy prices.

We are still invested in US Treasuries and the US dollar as global markets cotinue to slow and outflows from equities into bonds continue to rise.