Over on his Crossing Wall Street blog, Eddy Elfenbein had a post about the most overlooked chart of the year. Pictured above, you can see that the 10-year TIPs spread (the market’s inflation expectations), in red, and the S&P 500, in blue, have been closely correlated over the past several years. Off of the major bear market bottom for equities in 2009, TIPs screamed ahead. Recently though, inflation expectations have lagged behind stocks since the October 4th, 2011 bottom.
While I am not crazy about performing rigid technical analysis on something like TIPs, it should be obvious from the weekly chart below that TIPs are in a sustained uptrend, consolidating over the past few months. In addition to a slew of unresolved divergences that I have discussed in recent weeks, I am watching to see in which direction TIPs break out of this consolidation, which history tells us should give us a good indication of where stocks want to go in the near future.