A Technical Look at Next Week's Market

There are two parts of the inflation story to discuss, with the first part occurring on Wednesday, when the U.S. Labor Department said the CPI index rose less than expected in April. That is a sign that the slowing economy may be bringing about a long-awaited easing of inflation. The core price, excluding food and energy costs, rose 0.1%. Last year, they rose 2.3%, which the Federal Reserve said was above their comfort zone.

To be frank, I don't know who out there believes these manipulated numbers that the government puts out. I think it's better if investors forget about what the government is telling them, and pay attention to the market's reaction to this type of news.

First of all, stripping out food and energy costs is a major portion of every U.S. citizen's expenses. Just ask the person walking down the street if he sees inflation when he goes to the gas station or grocery store.

Even though the Federal Reserve states that higher prices for food and energy are not overflowing to other areas of the economy, like wage inflation, the bond market may be telling another story. The other part of the story is that inflation trends in Asia could be pointing to a major shift in interest rates.

Bond Yields See a Bottom?

To see what is going on, let's first take a look at the 10-year Treasury yield index. You can see that it has been moving steadily higher since the bottom in March. Over the past month, it has been holding well above its 50-day moving average, and is currently right up against the 4% resistance zone.

A solid break above this area would likely suggest that bond yields have certainly bottomed and that a major change in interest rate trends are taking place. This will be one of the first major signals that bond traders see inflation that is much higher than the government's numbers.

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At time of publication, Manning had no positions in the stocks mentioned, although holdings can change at any time.

Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Manning appreciates your feedback; click here to send him an email.