The S&P 500 dropped 3% from their highs but managed to close yesterday just above its daily trend line support. It also managed to stay above 4100 yesterday at the lows of the day.That did hot happen by accident. The selloff found buyers at those levels. There can certainly be more downside but I would bet that any more downside will be met with aggressive buying. The 3% move down was mostly due to big tech selling. Why did big tech sell off? Because the market thinks that inflation will be prevalent. Sorry but they are very wrong! The market has a fixation about inflation moving higher. Here is why they are so wrong!
Since 2008 there has been talk about rising inflation but it has never materialized and it certainly will not now. Just because lumber has risen 130% it does not mean that the economy is now in an inflationary environment. Higher prices come and go. Just take a look at crude oil over the years. Real inflation can only increase if it is derived from higher wages. That is what makes inflation sustainable. But even when the unemployment rate was at 3.5% in 2019, inflation did not go above 2.3%. Our problem is not inflation but it is disinflation. So why is is so hard for inflation to move higher? It is because there is less demand for labor due to increased productivity and innovation. Guess what? Covid accelerated those themes and they are not going away anytime soon.
I have more to say on this topic and will share my thoughts in the coming days. For now stay long and keep buying the dips!!!