Lee AdlerT-bill Coneheads Must Consume Mass Quantities Despite soaring Treasury borrowing and massive monthly issuance, markets have absorbed the supply through surging interest income and liquidity.…
Ten days ago, I was stunned when the stock market did exactly the opposite of what I had forecast for July and August. Based on monstrous Treasury supply pressure that we knew was coming, I had expected a gathering crunch, not just for Treasuries, but also for contagion into other assets.
Not only did that not happen, stocks broke out, and even gold and precious metals started to recover. The Macroliquidity™ model, which I have tweaked and adjusted through the 26 years I have been publishing these reports, failed to foreshadow the stock market breakout. It correctly identified that the bond market would increasingly tighten. That part has played out, although so far somewhat more mildly than I thought. But the stock market breakout to new highs was a shock to the model.
I agonized over it. What did I miss! And then I had a flash of recognition.
Last week’s geopolitically driven breakout confirmed the intermediate-term uptrend, creating a meltup channel in the S&P 500. Cycle projections have moved higher across the board. The short-term technical setup favors further gains. The longer-term trend remains bullish until major support levels shown in the report are broken.
Cycle and momentum indicators are in bullish configurations. The problem is that in bear markets such patterns typically fail. That requires patience and proof before action. Price patterns need to resolve upwards from bases, which in this case would be a daily close above xxxx. Conversely, a breakdown would target support around xxxx. Weeks of sideways churning are more likely to be a consolidation leading to a xxxxxxxxx.
The latest Daily Treasury Statement data delineates an unsustainable explosion in outlays and a definitive breakdown in tax revenue growth. But yesterday’s stock market breakout creates an acute point of tension versus the Macroliquidity™ model, and would force a critical reassessment if the rally continues beyond today.
Friday’s rally kept the S&P 500 in a rangebound pattern now three months old, with cycle work pointing toward xxxxxx formation stretching into September-October even as a longer-term path to xxxx stays on the table if resistance gives way.
Cycle and momentum indicators are in bullish configurations. The problem is that in bear markets such patterns typically fail. That requires patience and proof before action. Price patterns need to resolve upwards from bases, which in this case would be a daily close above xxxx. Conversely, a breakdown would target support around xxxx. Weeks of sideways churning are more likely to be a consolidation leading to a xxxxxxxxx.
The S&P 500’s triangle breakout failed immediately last week, and cycle, momentum, and breadth indicators are lining up around a synchronized outcome. This week’s action around key support levels should clarify what that outcome is likely to be. This report describes the criteria to watch, and what to expect if they are triggered.
Primary Dealer fixed income holdings have fallen since March, and most of the decline appears to be mark-to-market losses. The Treasury keeps adding supply, of which the Fed absorbs only a fraction, leaving dealers to take their share, required by their special status, as bond prices erode and the 10 year yield pushes toward 5%. The result is a deleveraging cycle in dealer balance sheets that raises the risk of forced, disorderly liquidation across markets.
This report shows where the cracks are in the Primary Dealer holdings, financing, and hedging statistics through mid-July. It also includes a look at hedge fund positions in the bond market, which are another canary in the coal mine of deteriorating liquidity conditions across asset classes.
This report features two charts that tell a coherent and sobering story. Repo financing that has quietly fueled this rally is plateauing in exactly the pattern that has preceded every major correction of the last few years. At the same time, junk bond spreads are sitting within a hair of their tightest levels in three years, which is precisely the condition that leads to an eventual unwind that is violent instead of orderly.
I have warned for months that the wave of Treasury supply set to hit in July would open a window of extraordinary risk. Below, these two charts, which you won’t see anywhere else, show why the calm on the surface is the least reassuring thing about this market.
reason for caution, given the weakness in longer term indicators.
The S&P 500’s triangle breakout failed immediately last week, and cycle, momentum, and breadth indicators are lining up around a synchronized outcome. This week’s action around key support levels should clarify what that outcome is likely to be. This report describes the criteria to watch, and what to expect if they are triggered.