"Stagflation" Chorus Grows, But Some Not Singing Along

The Philly Fed's poor business conditions readingput a dent in stocks and gave the "stagflation" chorus more proof that the economy is slowing. But interesting were comments from J.P. Morgan's David Kelly on "Squawk on the Street" today. He says an important component, necessary to support the idea that inflation is rising as the economy slows is actually missing from the current economic picture.

"We're not going to have stagflation," he said. "Inflation is a lagging economic indicator. You've got this slowdown in economic growth. It's going to take the wind out of wages, and in fact wage growth has been slowing for over a year now, on a year-over-year basis."

"Inflation is always and everywhere a wage phenomenon in this economy. If you don't get a big increase in wages, you're not going to have big inflation," said Kelly, who is chief market strategist with J.P. Morgan Funds.

Kelly did say the big drop in the Philly Fed's index was a surprise. "It got weaker. It does show that manufacturing is in some serious trouble," he said, noting though that manufacturing only accounts for 10 percent of the U.S. work force.

He also said the economic stimulus package should start kicking in during the second quarter as government checks start going out in May. The stimulus could add a percent to GDP in the second, third, and fourth quarter, and if there is a recession it would be very short and mild.

"I think stocks are looking cheap here. This is a good time for investors to keep their nerve," he said.

Getting Technical
You may be noticing more technical analysts on CNBC these days. As BlackRock's Bob Doll told us recently, in a market like this, everybody turns to their technician. I took him to mean a market that lacks logic and is unclear about fundamentals. And quite possibly, if you go with your gut, you'll be wrong. So bring on the technicians.

"Squawk on the Street" brought on Scott Redler, chief strategic officer with T3 Capital chief strategist.

Redler explained the market has formed a wedge pattern, which develops after a major event. In this case the market put in a major bottom in January and then the Dow bounced to 12,700. He said the market has put in a pattern of indecision and is ready for resolution. It hit lower highs, creating a descending trendline, and also hit higher lows. He explained that this formed an apex, an inflection point where the market is so "coiled," that it is ready to make a major move as volatility explodes.

"Right now, I can't forecast which way we're going to break out of this wedge...All we know is traders are bracing for a directional move," he said. That move will take the market out of its current range. If it is a bullish move, the Dow could go to 13,200. If it's downside, the Dow will retest lows.

Redler said there are some signs that it could break to the upside. He noted that agriculture stocks are breaking out, as are oils and drillers. He pointed to buying interest in a move up by Research in Motion yesterday. That stock has gapped up today on positive sales news.

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