CNBC’s Jim Cramer said on Wednesday that inflation may be peaking and the market may recover soon, relying on chart analysis from legendary market technician Larry Williams.
“The charts and history, as interpreted by Larry Williams, are suggesting one crazy thing, which is inflation may peak soon, and then a second crazy thing, the stock market bottom and a nice wide rally is due from here to the end of June. And given the His track record, I wouldn’t be surprised if he’s right on both,mad money‘ said the host.
“Of course, his forecast also suggests that we will get a pullback in August, with stocks rebounding again towards the end of the summer,” he added. “This methodology can’t tell you the size of a potential move, but it’s surprisingly reliable when it comes to predicting the general direction of the market.”
To explain William’s methodology, Kramer first explained that according to the technician, there are two ways to deal with inflation:
- Constant CPI. This measures the cost of the basket of important items that change the price slowly.
- Flexible consumer price index. This measures the cost of the basket of important items that change the price quickly.
In the chart below, the flat CPI is shown in orange while the elastic CPI is shown in black.
Cramer said Williams has noticed that the elastic CPI is at a record high and in the region where inflation usually peaks.
The chart below shows the three-month rate of change for the core elastic CPI in black with the 12-month average change in brown dating back to 2016.
Cramer said elastic CPI is often a reliable leading indicator of sticky CPI according to Williams, which means that after prices of elastic goods start to rise, firmer ones start catching up. This graph shows the elastic price of the CPI, which peaked last year.
“This tells Larry that we may already be starting to turn a corner on inflation,” Kramer said. “It’s not clear to anyone on the surface yet.”
It should also be noted that inflation has historically remained above 2.5% for an average of 29 months before declining, according to Williams. Inflation has held above 2.5% for 14 months, Cramer said, which means “we may already be half way through.”
Williams also noted that CPI has a dominant five-year cycle, indicating that it should peak in the middle of this year and continue declining until 2025, Kramer said. This is the graph showing the cycle:
Another tool used by Williams, Cramer said, is the Advance Decline Line, a cumulative indicator that measures the number of stocks that are increasing per day compared to the number of stocks that are decreasing.
“Williams sees it as a great way to get a real sense of the stock market’s inner strength…but he also likes to use the up/down line to make cyclical forecasts,” Cramer said.
“If you can get a sense of what direction the advance/lower line might go, you will know when large-scale rallies or dips are likely to occur. For Williams, this is a more stable way of measuring the temperature of the market than looking at a specific indicator.”
Below is a graph of the advance/lower line going back to May 2021. Williams cyclical forecast in red:
“As he sees it, the dominant short-term cycle in the advance/decline line lasted for about 60 days, although there is an annual cycle of about 240 days. The red line here combines these two cycles to give us a forecast,” Kramer said.
He added that expectations indicate to Williams that it is time for the advance / decline line to rise, which means that A “large and broad stock market rally” could run into May, and possibly even the end of June.
open an account now For the CNBC Investing Club to keep track of Jim Cramer’s every move in the market.
“Beer fan. Travel specialist. Amateur alcohol scholar. Bacon trailblazer. Music fanatic.”