Just one day after my last “Sector Watch” column (March 9), the stock indexes had clearly had enough of being nags and decided to go the stallion route instead. In fact, the S&P 500 galloped 20% higher in just eight trading days before hitting its 50-day moving average late last week. 

Why $21.22 Is Your Inflation Protection Level

Question is… has the bear market rally over the past two weeks been solid enough to generate new buy signals? Well, yes and no…

History Repeating?

While some indexes did establish buy signals, a number of them weren’t able to reach their optimum downside targets. While this is can sometimes create false signals, the bigger picture indicates that the signals are probably valid.

What is much more certain, however, is that the indexes are tracing out a larger consolidation pattern. That movement could mean that the Nasdaq indexes will test their January (and possibly even November) highs before any serious selling resumes.

Long-term consolidation patterns are nothing new for stock indexes. In fact, the current pattern on the S&P bears some striking similarities to the larger one that ended in 2002 – as you can see on the monthly chart below…

The main two similarities that jump out between these two bear market consolidation patterns is that…

• The selloffs began from almost the same levels
• Until March, the number of points lost was practically identical

The key difference between the two time periods, though, is that the 2000-2002 bear market lasted over 2½ years, while the current bear market is only in its 18^th month.

This means that even amid a strong rally at the moment, investors should be very wary about calling this the bottom and jumping back in with a vengeance. Bear market rallies often lure investors back to the party with quick, sharp upward moves… only to run out of steam and head back down.

Practice Patience During March Madness

So don’t expect a new bull market to start here. Before the five-year bull market that followed the last bear market, the indexes went through an eight-month consolidation pattern. And even if we use the November low as the start of the consolidation pattern, this one has only lasted four months.

In addition, when we see steep declines – as we have done recently – it usually requires a longer consolidation period while time plays catch up with price.

In 2003, we didn’t know that the market’s consolidation pattern was complete until weekly buy signals were triggered. And right now, it’s just too early to even consider calculating where the S&P 500 would trigger a weekly buy signal.

What we can say, though, is that since the Nasdaq 100 didn’t violate its November low, it would have to get up to at least 1,387 points just to set up a weekly buy signal.

Fortunately, we can be more definitive with this week’s sector…

Your Inflation Buzz-Phrase: “Trillion-Dollar Bailout”

Last week, the Federal Reserve announced that will buy $1.2 trillion worth of government bonds, which will then be pumped into the U.S. economy,

It wasn’t just stocks that loved the news. Commodities did, too. A lot! For example, gold prices shot $70 higher from Wednesday’s low. And most other dollar-denominated commodities were higher by the end of the week, alongside foreign currencies.

Hot on the heels of that strategy, the government revealed its own trillion-dollar move today. The “Public-Private Investment Program” will buy $1 trillion worth of so-called “toxic assets” in order to shore up U.S. banks’ sagging balance sheets.

Stocks may love all this trillion-dollar bailout news – in the short-term. But over the longer-term, most analysts agree that we’ll see something else rise soon: Inflation. Hardly surprising, with the U.S. mint continuing to run the presses at a rapid clip.

If we do indeed see that result, it means one thing: The value of the U.S. dollar has nowhere to go but down. And that will consequently force commodity prices higher.

Take a look at the daily chart of the PowerShares DB Commodity Index Tracking Fund (NYSE: DBC)…

As you can see, DBC closed above its 50-day moving average (marked in red) – the day before the Fed’s $1.2 trillion announcement. It then closed higher for the rest of last week.

The important number is $21.22 – the level it needs to close above in order to trigger a daily buy signal. If it can do that, it’s a very good area from which investors can buy into the broad commodities sector on pullbacks – something that would provide a good hedge against inflation, as well as price appreciation.

I suggest using a couple of closes below the trendline (blue) as a stop loss.

Source: How to Protect Your Portfolio from Inflation