Jay Powell’s first order of business is to keep the bond market from breaking down. When the 10 year yield hit 0.975 last week before backing off, the market was at the edge of the abyss. Leveraged dealer bond portfolios were on the brink of disaster.
In this Part 2 of the report, I cover the remaining interesting and important indicators that comprise the CLI. Each has its own story to tell, but they all lead to the same conclusion. Still bullish, and, unbelievably, one key component says that the stock market is oversold.
I find it difficult to wrap my head around that. But I won’t argue with it. If there’s one thing I’ve learned in 53 years of watching markets virtually every day, it’s not to argue with impartial indicators. They don’t care what I think should happen. They just show what is happening.
Are You Kidding Me?
Can this be right? Did the stock market become oversold in mid October versus Composite Liquidity. This chart said that it did. And even after this huge 2 week rally, it’s still much closer to oversold than overbought. The S&P 500 is still near the bottom of the liquidity band.
It’s very similar to a look it had in July 2011. That preceded 4 years of a relentless, virtually unbroken bullish string.
What should cause us to expect change?
The TBAC’s quarterly borrowing schedules are central to us because they tell us the schedule of expected new Treasury debt issuance (supply), months in advance.
Tax collections improved in October, but are still well below pre-pandemic levels. The US may look like it’s recovering, but it’s still in the hole it dug when Covid19 first hit. That means that Fed policy isn’t likely to change any time soon.
We’ve had two working theses over the past few months. One is that the Fed is no longer pumping enough cash into dealer accounts to keep an endless bull trend going. Instead, at best, there’s only enough for rotation between stocks and bonds.
The second thesis was that because dealers are so leveraged, any fall in bond prices, reflected in an increase in bond yields, would mean big trouble for the markets.
Last week I was surprised when the US Government’s retail sales data hit a new high. No way, I said.
Yes, some retailers are seeing booming sales, particularly online, and … wait for it…
Grocery stores. Even after pulling back from the lockdown spike, they’re still up more than 7% year to year.
Now there’s a basis for a thriving, growing US economy.
The market has the benefit of $115 billion in Fed mid-month QE MBS purchase settlements this week. That would normally be very bullish. Follow the money. Find the profits!Liquidity is money. Regardless of where in the world that money originates, eventually it flows to and through Wall Street. So if you want to know the…
The Fed’s balance sheet has now grown by over $2.8 trillion since March. That’s when the pandemic panic was at its extreme and the Fed went into high gear. Lately that growth has slowed drastically, to around $51 billion per month on average since July. But that is decidedly not the whole story. Follow the…
Tax collections have leveled off at a negative year to year rate. The Fed has gone to Congress begging for fiscal support for the US economy, as a result. Without a deal to raise spending, the economy will continue to languish, and the Fed will continue to print money to support the markets. Follow the…