The stock market looks even more oversold versus macro liquidity than it was in August. So, no surprise, it, and the bond market have both been rallying for a couple of weeks.
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But is the market really oversold? I don’t think so. Bull market oversold parameters are one thing. Bear markets have different parameters. Remember that it required massive liquidity growth just to keep stocks on a bull trend. That growth became insufficient to support bull markets in both stocks and bonds since mid 2020. That’s because the US Government was sucking up almost all of the Fed’s QE. Non-subscribers, click here for access.
Now the Fed not only isn’t funding that, it’s pulling money out of the banking system that would have been available to support new Treasury supply. At the same time, it’s causing the Treasury to have to issue even more supply, so that it can redeem the Fed’s expiring holdings on which it now wants repayment. That causes forced liquidation of all asset classes, not just bonds. Non-subscribers, click here for access.
So in order for the market to be truly oversold in this new ballgame, how low must it go? We don’t know. I’ve made a shadow channel on the chart as a first guess. But it’s really a wild guess. We just don’t know how deep a selloff will result in enough of an oversold condition to generate a rally that lasts more than a month, let alone a major bottom. Non-subscribers, click here for access.
There are other ways we can look at this data that may be instructive, but for now, we’re even more in the dark than usual. Meanwhile, everyone who is guessing about a Fed pivot can go right ahead and be my guest. Because, as we all know, money moves market trends. Talk is only good for blips. Try to catch them at your own risk. Non-subscribers, click here for access.
In this report, I update our regular look at the big picture liquidity indicators that will tell us exactly in what direction, and when, the markets will make their next big moves. Non-subscribers, click here for access.
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