Category: Fed, Central Bank and Banking Macro Liquidity

Stock Prices and Market Liquidity: Extreme Valuations and the Path to a Potential Bear Market

Stock prices are currently stretched beyond any extreme levels seen since the 2000 Internet/Tech bubble peak when compared to market liquidity. However, this alone isn’t enough to trigger a sell signal. Liquidity continues to grow, and there’s nothing to stop it from expanding further. Similarly, stock market valuations, which reflect long-term market sentiment, are likely to become even more extreme in the foreseeable future. Non-subscribers can click here for access to the full analysis.

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Liquidity Growth and Stock Market Valuations: What Investors Need to Know

Despite the current extreme valuations, liquidity is still on the rise, providing support to the market. This continued growth in liquidity and sentiment could drive valuations to even higher levels, prolonging the bull market. Non-subscribers can access the full report for in-depth insights. Non-subscribers can click here for access to the full analysis.

When Market Sentiment Shifts: Preparing for a Potential Bear Market and Crash

When market sentiment does eventually shift, it is unlikely to result in a typical correction. The greater risk is a significant bear market, potentially with one or more market crashes along the way. While we are not at that point yet, this report explores what investors can expect as market conditions evolve. Non-subscribers can click here for access to the full analysis.

Impact of the Debt Limit and Political Factors on Stock Market Timing

The re-imposition of the U.S. debt limit on January 2 could trigger the usual political instability that accompanies these episodes. This report highlights how these political factors could impact the timing of the next stock market peak and what investors should anticipate for the future of the market. Subscribers can download the full report for detailed analysis.

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Measures of Primary Dealer holdings, financing and hedging are flashing warnings of an approaching stock market top. After surging for a couple of years they’re diverging from supporting bullish stock and bond market price trends. The last time this happened was in 2021, in a process that lasted around 14 months before the market reversed. Non-subscribers, click here for access.

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No two historical periods are identical. But the current divergences and signs of retrenchment have lasted almost as long as the prior instance. Once the mass psychology that fed the bullish trend begins to reverse, the deleveraging starts. That reversal then becomes self sustaining . First it happens slowly. Then it happens suddenly. We want to be on the alert to be out of long positions. We also want to position for shorts before that sudden phase hits.  Non-subscribers, click here for access.

Liquidity measures set the context. They’re warning that we’re in the late stage of this bull market. It’s time to be alert to any signs of reversal in the technical indicators. For the bond market, that could be something as simple as the 10 year yield xxxxxxxx xxxxxxxx. Once that happens, the potential for a hard selloff in the bond market increases. That could erupt into contagion to stocks. Non-subscribers, click here for access.

However, there’s a wild card. Come January 2, the Federal debt ceiling will be reimposed. The incoming administration will begin to deal with that on January 20. The new government has yet to tip its hand. Will it allow the clock to run until Treasury cash runs down to zero until it raises the debt limit? Non-subscribers, click here for access.

The Treasury’s practice in past episodes of debt ceiling roulette has been to use Treasury cash to pay down T-bills. Meanwhile it continues issuing coupon debt on the pre-ordained schedule. That has bullish effects for stocks, because T-bill paydown pump cash back into investor and dealer accounts. Some players then deploy that into the stock market. Non-subscribers, click here for access.

That effect would last until Treasury cash approaches zero. If that’s the policy choice, that process takes 5-6 months to reach a climax. At that point, they must raise the debt limit. Otherwise we leap into the unknown where the US government can’t pay its bills. I reveal what that would mean in this report. Non-subscribers, click here for access.

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Treasury supply is scheduled to moderate over the next 3 months but there will still be moments of pressure on the markets. How the new government treats the debt ceiling reimposition on January 2 is a wild card. If it treats the debt ceiling as inviolable, then it will pay down T-bills for a few months until it runs out of cash. Those paydowns would be bullish. Non-subscribers, click here for access.

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Primary Dealers were wrong about the Treasury market in September, and it has cost them. They reached a small net long position in their hedged bond accounts just as the bond market was topping out in price terms. Since then, bonds have gotten crushed and yields have soared. The dealers aren’t net short enough to profit.  Non-subscribers, click here for access.

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We had recognized the potential for a turn in the last report on dealer positions. 9/11/24- Technically Treasuries are near an important inflection point on the charts. Repo shows extended leverage among dealers. They are slightly short overall, which isn’t bullish for the big picture. They are leveraged to the hilt and they’re taking hits.

There’s no information to suggest that the young downtrend in bond prices and uptrend in yields will reverse anytime soon. A bullish turn may need to await the reimposition of the debt ceiling in early January of next year. That’s because if the Treasury follows past practice, when the debt ceiling is imposed, the Treasury will pay down T-bills. That puts cash back into dealer and investor accounts, enabling them to absorb Treasury coupon supply, and to buy stocks at the margin.

But until then, there doesn’t appear to be a catalyst in this data to cause a reversal in the bearish environment for bonds. I had worried about that being a catalyst for contagion into stocks, and we may have gotten our first dose of that today (October 31) with the S&P 500 dropping 108 points.

It looks as though the period from now until the beginning of 2025 will be a time of xxxxxx xxxxxx. We had a xxx xxxxx xxxxxx today. This suggests that it’s time to xxxxxx xxxxxxx xxxxxxxx xxxxxxxxx. I will look for those setups and report on them as they arise in the swing trade stock screens.

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Market rallies continue to be supported by adequate liquidity, but there are chinks in the armor. Nothing outright says “Sell now,” but there are warning signs that say, xxxx xxxx now. It’s probably too late. Non-subscribers, click here for access. 

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One item to watch closely is repo usage. Repo growth is absolutely necessary in this market to fund an uptrend in stock prices. And Repo has been dropping like a rock since peaking at the end of September. So far, there’s just a break of the short-term trend, which isn’t significant in the big picture, but it could be if it continues, or backs and fills for a while and then breaks down. Non-subscribers, click here for access. 

We also need to watch the Fed’s RRP slush fund as it approaches zero. That will become one less bullish prop for the markets. It has been a form of deferred QE, or strategic QE reserve, stored up from the old days when the Fed pumped so much money into the system, $2.5 trillion of it wasn’t able to be deployed. Now that RRP money is almost all gone, absorbed by a couple years of Treasury issuance. Non-subscribers, click here for access. 

Meanwhile, total money is still surging, so there’s still plenty of cash around. That’s a reflection of the market generating profits, and money growth, on its own. But it’s not a matter of sufficiency. It’s a matter of willingness to deploy, and that’s at an all time high. The question is how much farther can that willingness be stretched as prices rise higher and higher. Non-subscribers, click here for access. 

The markets are creating money with no help from the Fed. That’s strictly a matter of sentiment, or call it animal spirits. And that can change. That change is what we are looking for in this liquidity data. Right now the markets are especially vulnerable to sentiment changing. Stock prices are more extended versus money supply than at any point in history. Which means that the risk of a sentiment change is higher than at any point in history. Non-subscribers, click here for access. 

For now, the stock market remains a xxxxxxxx xxxxxxx. The bond market has probably already made xxxxxxx xxxxxx xxxxxxxx, but it will be a jagged path that will depend in part on the supply schedule. Yields began to soar as bond prices plunged in recent weeks. But thanks in part to light Treasury coupon issuance this week, ……… Non-subscribers, click here for access. 

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