I have tried in these reports for the last twenty years to identify the most important forces driving the stock market. To some extent, I’ve been successful at that, although sometimes a bit early, or a bit late, in recognizing just what the hell is going on. I just hope that my analysis has helped you along the way.
But there are many forces to which people like me, operating on the outside of the system, are not privy. And there are forces at work that no one can see or understand.
Stock market analysis requires many disciplines. Unlike, physics, for example, it’s not rocket science. Hell, it’s not even science. But while physicists and astrophysicists understand more and more about how the universe works, there is much more that they don’t understand. For every theory that they confirm, more questions arise.
They say that approximately 80% of the mass of the universe is “dark matter.” They don’t know what it is. And there’s “dark energy,” that they don’t understand either. They see their effect, but they can’t see the cause, and don’t know what either of them is. So they observe and measure the effects, and make predictions and develop theories based on that.
Liquidity analysis isn’t science, but like physics, when we observe things, we find plenty of dark matter and dark energy. They move things. I don’t know what those dark forces are, but you and I can see their effects in the markets. We can measure those effects, and make predictions from observing them. We call that study, “Technical Analysis.” It’s the other facet of my research.
When darkness engulfs the forces driving the effects, then we all must pay particular attention to the patterns of those effects and learn what we can from them, that is, the technical analysis. Liquidity analysis provides, to the extent of the forces that we can see and measure, the context.
The Composite Liquidity Indicator is a hybrid of fundamental liquidity analysis and technical analysis. When I last reported on it about two months ago, I was forced to conclude, much to my surprise, that the stock market was oversold.
In other reports, I have shown my analysis and conclusion that when the 10 year yield rose above 1%, the Primary Dealers would be in trouble, leading to the potential for a crash.
Those two conclusions aren’t mutually exclusive. It’s a matter of timing. Markets only turn on a dime at bottoms. Tops take time, a lot of time. They can last a year or two.
The current situation reminds me of 1987, however. Then, the bond market began to crash in May. Stocks crashed in October. Will there be a similar 5 month lead time now? Doubtful. It’s a different ballgame today with the Fed aggressively supporting the market week in and week out, and vowing to do whatever it takes to keep the bubble from bursting.
In addition, we know that the dealers and other leveraged players are hedged. Apparently, those hedges are working well enough for now. They’re also getting a boost from individual stock traders.
So is my analysis and conclusion about the likelihood of a stock market crash following on the collapse of bond prices since August just flat out wrong? Or is it merely a matter of time?
I think the latter, but the financial system has far more moving parts than even the biggest institutions can track and understand thoroughly. Furthermore, there’s always something new that we hadn’t thought of before.
To sum up, I made the huge call that the stock market would follow the bond market in crashing, because Primary Dealers were overloaded with long inventory and overleveraged in financing it. I set a line in the sand of 1% on the 10 year. Last month, they crossed that. Stocks are still going up.
Here’s what the components of the Composite Liquidity Indicator show us about that, from the perspective of the space-time continuum, dark energy, black holes, Black Scholes, Einstein’s Theory of General Relativity, Maslow’s Hierarchy of Needs, and, of course, Hobbes’s, “It’s solitary, poor, nasty and brutish to be short this market.”
The facts, figures, outlook, and strategy are reserved for subscribers. Click here to download the report.
Not a subscriber yet?
Get this report and access to all past and future reports risk free for 90 days!