We think inflation is on the rise, a sense confirmed by another new all-time high in the Goldman Sachs Commodity Index last week. We also think that barring a severe economic slowdown, higher inflation implies higher interest rates. While both of these possibilities suggest some headwinds for the stock market, as often repeated in these missives we don’t see signs of a “top” despite our lingering worries about optimistic valuations. In fact, on a purely technical basis, the chart of the S&P 500 looks pretty bullish given the upside breakout that occurred two weeks ago. However, while the SPX was tagging new all-time highs the stock market’s internals were weakening, as measured by new highs versus new lows, upside versus downside volume, buying climaxes (suggests stocks being distributed, or sold), etc. Still, as we have repeatedly stated, “The upside should be given the benefit of the doubt.”
Consistent with these thoughts, we have been using what we consider fairly defensive stocks, preferably ones with a yield. Names used have been General Electric (GE), Johnson & Johnson (JNJ - Strong Buy), MeadWestvaco (MWV), Flagstar Bancorp (FBC - Outperform), Quadra Realty (QRR), and Wachovia (WB), all of which are followed by Raymond James or our research correspondents. And we are adding 4.6%-yielding Pfizer (PFE - Strong Buy) in light of our analyst’s upgrade. We have also recommended a number of ETFs that play to our various themes, like the PS Aerospace & Defense ETF (PPA) and the PS Water Resources ETF (PHO). Interestingly, there is a relatively new water-based ETF for your consideration with a number of global names in it, consistent with our invest internationally theme. That name is PS Global Water Portfolio (PIO).