Market Update: Could Inflation Worries Turn The Trend?

May 19, 2021
by Joseph Jeffriess, Market Analyst

Hi traders, today we’re looking at the daily US30 daily chart and discussing if inflation worries are the reason that stock indexes could turn lower.

Change of Direction or a New Cycle

Currently, we’ve seen a shift in momentum on stock indexes to sellers. Apart from market cycles coming into play which is a key I believe in. Reasons and influences are put forward to justify why a market has started to change direction. These can be dead on at times. In other times it can be nothing more than a headline to explain a market moving into a new cycle.

When market trends reach a point of maximum expansion it can only be their own weight that turns the trend, at times. Certain reasons and developments can come along at the right time to fuel the turn and make sure the train gets rolling. We saw this before the GFC as markets were way overextended. The housing debt worries emerged and timed the highs to set of selling that hadn’t been seen for a long time.

Inflation is Key

Inflation chart in a newspaper

Looking at the current picture, equity markets have been on a one-way track since March 2020. Are markets overextended and overcapitalized? At a certain stage, a market can run out of buyers. Have we reached a peak? The latest influence that has started to add to the cracks seen in equity indexes is inflation. US inflation continues to rear its head causing worry. US CPI shocked the markets hitting 4.2%. Government spending is a diver currently as we saw weaker than expected jobs data and retail sales data in the prior weeks.

Global stock indexes have started to shift and we’re seeing that this week as sellers have started to take control. The ASX shed close to 2% in today’s sessions and the European indexes are seeing their second day of losses.

The Questions

Has momentum shifted? And has weight finally caught up with buyers?

The daily Dow Jones (US30) chart seen below has broken the medium-term trend and has formed a new lower high after the break. This pattern can show a shift in momentum but we would want to see a move back to, and break off the main trend to start to confirm that idea.

Could inflation worries be the kicker that turns the trend we have watched since 2020?

Dow Jones Daily chart, 19 May 2021

Dow Jones Industrial Average Daily Chart

All times are AEST.