Firstly I looked at the chart of the TIPS, which are the iShares Lehman Treasury Inflation Protected Securities, a $4+ billion ETF. The table below tells you much of what you need to know.

The TIPS chart of trading on the NYSE shows that the price ($98.24) is down -3.16 pct since the peak Dec 1 and 4 ($101.45-$101.48). But the RSI-7 is also just a blip north of 30 (32.9 actually) on the Daily data. RSI-7 for the Weekly is just 35.2 and it is just 32.7 on the Monthly as the second chart shows. In fact, the RSI peaked in 2Q06, which was the kick-off to Election Season. Now the election results are known, and the market is getting back to basics.

This chart shows the 3-month TIP performance compared to oils (XLE and XOM) and golds (UXG and NEM). As you can see, Dec 1 was a peak for the TIPS and the oils and the golds. After a decline of six weeks, there was a modest recovery. Then in the past three days, there has been a sell-off again.

So, as a result of three days' selling, there is now talk that "inflation is dead". Actually, what I think happened here is that there was an "inspired" termination of the cycle peak in May 2006, with Fed/Treasury intervention (as I discussed at the time). Then in October there was a cycle bottom (when I was pointing out the attractiveness of the golds/silvers) followed by a bullish move until Dec 1.

What is happening now is that the market is testing the bottom (not a top) for the inflation beneficiary groups (as RSI is showing me). The yada yada coming from Secretary Paulson and the yada yada to come from the FOMC meeting this week is a prelude to the Fed maintaining high rates (and possibly setting us up to increase them because other central banks are doing the same, like BoE, or about to do the same).

The bond market has been getting whacked in the past few weeks as market yields are rising. The yield on the 2-year and 30-year Treasury issues are now close to 5.0 pct and the 10-year yield is close to 4.9 pct. I suggest that anywhere from say 15 to 35 basis points higher on U.S. Treasury yields in the market may serve to start a sell-off of equities and switch to bonds.

So the capital markets are at a critical point here (ergo the yada yada from Washington). My thinking is that the RSI values for the TIPS, golds and oils are near a cycle bottom.

I continue to think GFI (Gold Fields) is good value under $16. Because of what happened after the Nov 29 adjusted 3Q number, which was very low and which was followed by much lower oil and gold prices, I'd wait before buying GFI until Friday's Q4 GDP data is out to see how low the Deflator goes. The consensus is +1.5 pct, but there are estimates as low as +0.5 pct up to a high of +2.0 pct.

The lower the number, the bigger will likely be the sell-off of the TIPS, golds and oils. But after the sell-off that will also likely be the cycle bottom I'd be looking for to enter purchases. If the GDP Deflator is as high or higher than consensus, I'd be a buyer right away.

You see, I'm not a believer that corn prices or wage rates or health insurance or (many other costs) are likely to fall. I also don't think the U.S. Administration/government is going to stop the current spending pace.

BCara@BillCara.com