Inflation concerns cast a potentially ominous shadow

Key points:

• On a trend-following basis, the major trend of the stock market can still be rated as favorable
• However, several yellow warning signs are flashing at the moment. History suggests that upside potential may be limited until some of these warning signs abate
• Few things hinder stock market performance more than signs of rising inflation. At the moment, the inflation signals are mixed, but remain a cause for concern

Mixed signals from the JK Inflation Model - still favorable, but definitely on high alert

The stock market hates uncertainty, and few things cause more uncertainty for investors than rising inflation. The JK Inflation Model is a model that looks at both Producer Price Index inflation and Consumer Price Index inflation. The calculations are simple:

A = If the 12-month rate-of-change in the Producer Price Index is less than +9% AND above -12%, then A = +1; else A = 0

B = If the 12-month rate-of-change in the Consumer Price Index is less than +4% AND above -3%, then B = +1; else B = 0

C = A + B

The JK Inflation Model = C

As you might expect, a reading of +2 is very favorable for stocks, a reading of +1 is slightly favorable for stocks, and a reading of 0 is unfavorable for stocks.

At the moment, the PPI 12-month change