Nobody wants to talk about inflation. It is hard to imagine that in this economy inflation could be a concern. Deflation is still the hot topic of the day amongst the economists. Gary Shilling is becoming extremely popular again with his book, Deflation: How to Survive and Thrive in the Coming Wave of Deflation. By the way, this is a great read for anybody studying the history of the markets. While the broader picture and past economic data might suggest that inflation is still a long ways off, the current market prices are suggesting a different story. Since the markets are forward looking indicators, I will take my cue from them.

But what markets should you be looking at? The first signs of inflation will always creep up in the capital markets, namely the Treasuries. This is due to the inverse relationship between bond prices and interest rates. If you remember your Economics 101 class, you will recall that rampant government spending, extreme monetary easing, and massive deficits all eventually lead to higher interest rates and higher rates of inflation in the long run. You can't continue to print money without eventually affecting the long-term interest rates. For anyone who trades the short term, or is a swing trader, the charts don't lie. Let's take a look at the charts on the TLT, or Barclay's 20-year bond.

Significant support has been taken out at the $100.00 level. While the volume is weak, a shift from the relative safety of bonds as an investment play to more speculative bullish equity plays is occurring. The recent 30% rally in the equity market has to be a testament to renewed investor confidence. Last week's consumer confidence report also pointed to a shift out of Treasuries and back into equities. The chart above suggests the next level of significant support for the TLT won't occur until about $93.00, so there is still room to fall.

In addition to the capital markets, we can take clues from the commodities markets for signs of creeping inflation. Commodity prices, as an input price, will traditionally act as a harbinger for forecasting inflationary pressures. Below I have included charts for some of the commodity ETF's that I follow on a regular basis. Included are MOO (agricultural products) and OIH (oil services).

The MOO chart is very telling of an upward bias. There is strong upward momentum demonstrated with the flag pattern pushing through the $31.00 level which had acted as resistance three times before. There is an increase in volume during this trend signifying this rally could have some legs to it.

OIH demonstrates a nearly identical bullish pattern with resistance being penetrated at the $89.00, albeit with less of a volume spike. The markets are speaking, and it is up to us to take notice. If you missed the first leg of the inflation trade, don't worry. With any pullbacks to our new support levels, there will be time to add more.

thinkorswim, Inc. and its registered employee, Joe Mazzola, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.