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Month: November 2020

In Weakness, There is Strength, and Other Gibberish

In view of the liquidity outlook, I’m on the lookout for a support test in the first half of the week. Pre market futures suggest that the market is on track for that. The futures tested the 3600 area in the pre market.

The market maintained a shallow uptrend last week. The S&P stayed in the upper half of a weak uptrend channel. The channel has a slope of +4 PPD. The centerline will start the week at around 3623 and rises to approximately 3643 on Friday. That line is initial support. A couple of old intermediate channel lines around 3610 also mark potential support. The bottom of the short term channel starts the week around 3560 and rises to 3600.

This report illustrates where the cycle indicators show the market to be headed.

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I’m adding 5 new picks conditioned on opening within the price bracket at the time specified on the table. 4 of those picks are longs, and 1 is a short. If all 5 picks meet their entry conditions, it will leave us with 16 open picks, of which all but one will be buys. That’s extraordinary and, may I say, scary.

The list showed an average gain of 4.8% with an average holding period of 11 calendar days last week. That was despite getting stopped out of 4 new picks on the short side almost instantly, with losses ranging from 2.1% to 9.2%.  That was offset by solid performances from the winners, all on the long side.

Chart pick performance changes week to week and past performance may not indicate future results, as you know.  Trading involves risk, and these reports assume that you understand those risks and manage them according to your tolerance. These reports are for informational purposes for experienced investors and traders. 

Here’s Why More QE Won’t Be Enough for the Markets

Here’s the problem. When rates are falling, there are more sales, and especially more refi. So the prepayments go up, and the Fed sees a greater reduction in its MBS holdings. Those reductions had been running at the rate of $65-70 billion per month through last month, based on the prepayment rate in the market in prior months. The Fed then bought that much from the dealers in the following months.

As always, those settlements were held in the third week of the month. The Fed would settle a total of $100-110 billion in prior forward MBS purchases that week, and the dealers would suddenly be flush with cash.

Good thing too. Because the 15th of the month is when the Treasury issues a pantload of new notes and bonds. The amount of Fed MBS purchases typically provided enough cash to the dealers for them to cover nearly all of the Treasury issuance. They could either buy it outright, or provide the repo financing to customers so that they could buy it. Then there was even some left over for them to play markup games with their equities inventories.

But mortgage rates have been rising since August. Prepayments are falling as a result. Home sales are holding up, but refis are cratering. As a result, the nearly final figure for the Fed’s MBS settlement in mid December is only $69 billion. That’s $30-40 billion less than in recent months.

At the same time, the TBAC says that the Treasury will issue $98 billion in new notes and bonds on December 15. The day before, the Fed’s MBS purchases will only total $52 billion.

That’s a problem. But there’s an even bigger problem next week. And an even bigger problem after that when the US Government passes new stimulus. Here’s why, and what to do about it.

The facts, figures, and outlook are reserved for subscribers. Click here to download the report.

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Baby Bears Have No Chance Against This Stampeding Herd

The market started a baby downtrend channel last week. The top of the channel will open on Monday at 3572. Here in the premarket around 5:30 AM in New York, that trendline was being challenged as, once again, Asia and Europe have rallied. This report shows you what to look for this week as it affects the longer term outlook.

Meanwhile, the after effects of the disastrous Pfizer gap of November 9 are receding and list performance is recovering nicely. The average gain rebounded to +5.6%, with an average holding period of 11 calendar days.

I have adjusted trailing stops on all but one pick. All ten existing picks are longs. I’m adding 6 new picks this morning, including 4 shorts and two longs. Entries will only occur within the order price brackets, and, if so, are assumed to take place at 9:45 AM. With these gap openings becoming common, that has been a better entry time in the morning.

Technical Trader subscribers, click here to download the report.

Not a subscriber? Try Lee Adler’s Technical Trader risk free for 90 days!  

Chart pick performance changes week to week and past performance may not indicate future results, as you know.  Trading involves risk, and these reports assume that you understand those risks and manage them according to your tolerance. These reports are for informational purposes for experienced investors and traders. 

The Passion of Jaysus

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.

Signs of a weakening non-recovery rescued them. Traders sold stocks, which freed up enough cash at the margin to bring bonds back from the brink.

Because of that, the Fed is ok with the weaker economy narrative for the time being.

Jaysus saves the bond market first. Stocks are just the saints of this religion. They get their share of worship. But the bond market is the Cross, the Torah, and the Koran all rolled into one. It is the focus of the worshippers. It is the altar upon which the really big money acolytes pray.

So the Fed looks at signs of weakness with relief now, because it sends the big donors in the pews. And the small part of the collection plate that the Fed doesn’t fill, those donors keep filling. And Jaysus keeps saving. Or so it appears.

But this seeming miracle is an Act that won’t work for long. Because if too many worshippers reject the saints of stocks, Jaysus himself runs a similar risk. If the flock loses faith in Him, the Church of the Fed will collapse. The bulls will all die and burn in the fires of financial market hell.

As for the bears, it’s too late. They’re so dead, they’re beyond resurrection. Nobody is short the market.

In the end, only liquidity matters. The Fed can create liquidity, but an economic narrative that leads to selling of any asset class can destroy that liquidity just as fast, or faster, than the Fed creates it.

So for that purpose we keep an eye on a few real time economic indicators that few others are watching, to keep us abreast of how the Wall Street economic narrative is going to play.

We’ve known for a couple of months that the “recovery” was a non-recovery. The Wall Street mainstream is starting to catch up with that.

This report updates us on what’s happening now in Federal tax collections, and therefore what the narrative is likely to sound like in the weeks ahead. It prepares us to be ready to act ahead of the most likely scenarios in the financial markets.

Here’s the bottom line.

Subscribers, click here to download the report.

Available at this link for legacy Treasury subscribers.

KNOW WHAT’S HAPPENING NOW, before the Street does, read Lee Adler’s Liquidity Trader risk free for 90 days!

Act on real-time reality!

Another Liquidity Indicator Shows Stocks Being Oversold – Wait, What?

Yesterday we looked at the overview of the CLI and the issue of new and secondary stock offerings. The CLI is still bullish. And the supply of new stock issues has not been sufficient to absorb enough of the demand to stop the advance of stock prices, although it has probably contributed to slowing the rise. Likewise, new corporate debt issuance, while massive, hasn’t been sufficient to pull enough of the demand for securities to cause a reversal of the rise in stock prices.

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.

So here we are. The Fed is creating enormous amounts of excess liquidity, “liquidity” being a fancy word for “money.” I use the words interchangeably.

The Fed is creating that excess by pumping money directly into the markets via its POMO operations—buying bonds from Primary Dealers and paying for them by crediting the dealers’ accounts at the Fed with newly imagined money. That leads to secondary effects of increasing money in the system via credit growth, particularly increasing margin credit that results from rising securities prices.

This works, and will continue to work, for as long as the players have enough confidence in the game to keep buying. This keep pushing prices higher, increasing the value of collateral. That, in turn, allows for and promotes ever more credit creation. It’s the quintessential nature of bubble finance. Circular, and more. Always more.

There are those who say that this isn’t sustainable. There are also those who say that an expanding universe isn’t sustainable, that it will collapse in on itself.

In a few trillion years.

I’m agnostic about whether this must finally end in collapse within the foreseeable future. I assume that it will, but I sure as hell don’t know when. So I’ll just operate in the here and now, and respect the trend. We’ll always be alert for signs of change, but at the same time, never forgetting Rules Number One and Number Two.

Don’t fight the Fed.

The trend is your friend.

Meanwhile, as Yogi said, you can observe a lot by watching. I’m confident that by always being vigilant, and open to anything, we’ll be ready just in time to take advantage of, or at least protect ourselves from, whatever is to come.

Now to the indicators.

The facts, figures, and outlook are reserved for subscribers. Click here to download the report.

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Not Just Liquidity, Why I Can’t Be Bearish Technically

Cyclically, there’s no reason to get bearish here. Cycles of up to 6 months duration remain in gear to the upside. A 4 week cycle high is due now, but it won’t matter if the 6-8 week cycle is dominant. Here are the price targets and theoretical timing of these expected moves.

Technical Trader subscribers, click here to download the report.

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Composite Liquidity Indicator (CLI) – Shows Stocks As Oversold

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 facts, figures, and outlook are reserved for subscribers. Click here to download the report.

This is Part 1 of a 2 part report. Part 2 will be published later today.

Not a subscriber yet?

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TBAC Magic 8 Ball Cloudy

In the second month of each calendar quarter the US Treasury gets together with a shadowy group called the TBAC, which stands for Treasury Borrowing Committee of the Securities Industry and Financial Markets Association.

The Treasury tells the TBAC how much money it will need to borrow to pay its bills for the rest of the current quarter and the subsequent quarter. The TBAC tells the Treasury how to schedule it. In other words, it sets out the type of issuance and the timing for the rest of the quarter and the next one.

In case you’re wondering, here are the current TBAC members. They change from time to time.

I just note that the Vice Chair is good old Brian Sack, who ran the NY Fed trading desk for several years. He was the guy who was in charge of executing the Fed’s trades with Primary Dealers in implementing QE. Now he’s making the big bucks on Wall Street as a “global eConomist.”

How would you like to be the firm that snagged him and his insider connections at the Fed? I wonder what that cost them.

But I digress.

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. In the good old days, before pandemics and debt ceiling crises, that was extremely useful information to have because the Treasury rarely digressed from the TBAC schedule.

That has changed during the last couple years of the Trump Regime, because the mechanism for being able to reasonably forecast the Treasury’s borrowing needs broke down. First, they broke down because the Regime wanted to manipulate Congress by using the Federal Budget as a cudgel. Then things got worse when the pandemic came.

Last week the TBAC issued its revised estimates for the current quarter, and its first stab at Q1 2021.

Subscribers, click here to download the report.`

KNOW WHAT’S HAPPENING NOW, before the Street does, read Lee Adler’s Liquidity Trader risk free for 90 days!

Act on real-time reality!