TRADING GAME PLAN REVEALED: Stagflation Fears & Market Warnings Mount

The market continues its slow, methodical grind higher, but beneath the placid surface, a complex and potentially treacherous current is forming. In this morning's TRADING GAME PLAN REVEALED, Gareth Soloway, Chief Market Strategist at VerifiedInvesting.com, peeled back the layers of the rally to reveal a growing collection of warning signs. From stagflationary economic data and historically stretched valuations to bearish signals in key commodities, the evidence suggests that traders should be exercising caution, not succumbing to complacency.

The Specter of Stagflation

Yesterday, the market received a confusing cocktail of economic data. On one hand, the Consumer Price Index (CPI) came in slightly hot, with the core number at 0.3%. On an annualized basis, this keeps inflation stubbornly above the Federal Reserve's 2% target. On the other hand, weekly jobless claims spiked to 263,000, the highest level in approximately a year, signaling a distinct weakening in the labor market.

Paradoxically, the market rallied on this news. Why? The spike in unemployment claims fueled speculation that the Fed might be forced into a more aggressive 50-basis-point rate cut at its meeting next week. However, this "bad news is good news" narrative overlooks a far more sinister possibility: stagflation.

"Which, by the way, is the definition of stagflation... people losing jobs and then prices still going up—that's the worst of both scenarios."

Stagflation, a term that evokes the economically painful 1970s, is a toxic environment where economic growth stagnates and unemployment rises, yet inflation remains high. It puts central banks in an impossible position. Cutting rates to stimulate the economy risks fanning the flames of inflation, while raising rates to fight inflation risks pushing a weak economy into a deep recession. The market's cheerleading for rate cuts in the face of persistent inflation and rising job losses may be dangerously shortsighted.

A Market at the Apex of a Wedge

The S&P 500's technical chart perfectly captures the market's current tension. The index is trading within a massive ascending wedge pattern that has been forming since May. This pattern is defined by two converging trend lines, and the market is now pressed directly against the upper boundary.

This is a critical juncture. The lower trend line has provided support on six separate occasions, each time launching the market higher. Now, for the third time since August, the upper trend line is acting as formidable resistance. While a breakout to the upside is possible, Gareth warns of a classic trap.

"When you look at up-sloping wedge patterns, if it does happen, oftentimes it's short-lived, like what they call a bull trap, where you get above it... and then it kind of gets everyone thinking, 'Oh, here we go again,' and then it comes back down and crashes."

This is why confirmation is paramount. A brief poke above the line is meaningless without a confirmed close, signaling that buyers have truly taken control. Until then, the risk of a sharp rejection from this level remains high. The longer price consolidates within this tightening range, the more powerful the eventual breakout—or breakdown—is likely to be.

The Rotation Game: A Sign of a Tired Rally?

Adding to the complexity is a growing divergence between the broad market and its tech-heavy counterpart. The Nasdaq 100 (QQQ) has been noticeably weaker than the S&P 500 recently, a sign that leadership is narrowing. Gareth attributes this to money rotation in a market that is running out of fresh capital.

"There's so much money that's already in the market—margin levels at all-time highs, institutions are involved, you have retail which has gone all in and then some... for the markets to go up, what do we have to see? Well, when Broadcom rallied on earnings, NVIDIA fell because money rotated."

This "robbing Peter to pay Paul" dynamic is a hallmark of a mature, and often tired, bull market. When there isn't a steady flow of new money coming in from the sidelines, gains in one area must be funded by selling in another. We saw this when Oracle soared on optimistic guidance, while giants like Apple and Meta faltered. This isn't a sign of broad market health; it's a sign of capital being shuffled around a table where all the seats are already taken. This internal churn can keep the headline indices afloat, but it masks underlying weakness and a lack of broad participation.

The Breadcrumbs of Caution: Valuations Flashing Red

While the market grinds incrementally higher, a series of reliable, long-term valuation metrics are screaming caution. These are the "breadcrumbs" that data-driven investors collect to form an objective view, detached from the daily hype.

The Buffett Indicator: This metric, which compares the total value of the U.S. stock market to the nation's GDP, is now at an extreme level. Gareth notes, "We are well beyond two standard deviations from the historical trend line." Historically, readings this high have preceded major market corrections, including the dot-com bust and the COVID crash.

P/E and P/S Ratios: Other metrics tell the same story. The S&P 500's 10-year price-to-earnings (P/E) ratio is also over two standard deviations above its historical trend. Furthermore, the price-to-sales (P/S) ratio has now reached a new all-time high based on this deviation analysis, surpassing even the froth of previous market peaks.

The VIX (Volatility Index): Known as the market's "fear gauge," the VIX is currently slumbering at 14.72. While this may seem bullish, levels between 10 and 15 historically represent extreme complacency. The VIX can remain low for extended periods, but these troughs have consistently preceded explosive spikes in volatility and sharp market sell-offs. It is a warning that risk is being underpriced.

Economic Barometers: What Copper and Oil are Telling Us

If the valuation metrics aren't convincing enough, two of the world's most important industrial commodities are painting a bleak picture of future economic activity.

Copper: Often called "Dr. Copper" for its ability to diagnose the health of the global economy, the metal is currently forming a "major bear flag." This is a bearish continuation pattern that suggests its recent price decline is likely to resume. This weakness is particularly telling. "If somehow we were going to avoid a recession—even with Fed cuts—then copper would be a lot higher, right? Especially with the build-out of data centers." The fact that copper is weak despite the massive, energy-intensive demand from the AI revolution is a significant red flag for global growth.

Crude Oil: Similarly, the chart of crude oil, a primary indicator of economic demand, is showing signs of a major breakdown. After holding a multi-year uptrend line since 2021, oil has broken below it, retested it from underneath, and now appears poised to move lower. Weakness in oil and copper points toward a global economic slowdown, a reality that seems disconnected from the stock market's all-time highs.

The Fed's Historical Trap: Be Careful What You Wish For

The market's current hope rests on the Federal Reserve riding to the rescue with rate cuts. However, history provides a sobering lesson for those expecting cuts to automatically fuel a new leg up in stocks.

"Look back at every previous recession—that doesn’t work out that way. I’ve never seen a recession where the market literally goes up during a recession... if the Fed cuts rates next week and you look at every past market scenario where the Fed starts cutting rates, what does the market do? It doesn't go up. The market generally starts to trend down."

Why? Because the start of a rate-cutting cycle is an admission by the Fed that the economy is in trouble. It shifts the market's psychology from "inflation is the problem" to "recession is the problem." Investors begin to realize the Fed is "behind the curve," reacting to damage that has already been done. Given the hot CPI data, Gareth believes the Fed's hands are tied. An aggressive 50-basis-point cut is unlikely. More probable is a single 25-basis-point cut followed by a "data dependent" stance, which could severely disappoint a market priced for a more generous monetary policy.

Conclusion: Watching for the Straw that Breaks the Camel's Back

The market is walking a tightrope. On one side is the hope of Fed-fueled liquidity, and on the other is the reality of stagflationary data, extreme valuations, and weakening economic indicators. While the slow grind higher can lull investors into a state of complacency, the warning signs are mounting daily. The divergence between indices, the rotation of capital, the weakness in commodities, and the historical precedent of Fed cutting cycles all point to significant underlying risk.

As Gareth concluded, you can have a hundred breadcrumbs signaling caution, and the market might still inch higher for a while. But eventually, the weight of the evidence becomes too much to ignore. The key for traders now is not to be swept up in the FOMO, but to remain disciplined, watch the data, and be prepared for the moment when the final straw breaks the camel's back.