Lee AdlerComposite Liquidity is flat and will almost certainly remain no better than flat for as long as the Fed continues to shrink its assets. There’s been just enough private credit creation, that is, money creation, to offset the Fed’s QT. So total liquidity goes nowhere. If bank deposits or foreign central bank purchases of US securities shrink, or if bank sales of Treasuries increase, the CLI will turn more negative. Non-subscribers, click here for access.
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That’s bad news for stocks and bonds, which have lately been doing poorly enough even with flat liquidity. That’s because constant massive Treasury issuance sucks more money out of the financial sphere than buyers of Treasuries have been creating by using repo to finance their purchases. Non-subscribers, click here for access.
Since the Fed started QT and liquidity turned flat, we have seen a shift in the overbought/ oversold parameters from what they had been under QE. We have an idea of where oversold is from the low one year ago. But as for overbought, we don’t have any idea. We only know that liquidity remains a constraint to upside progress, and an incentive for liquidation. So there’s reason to think that even if the CLI stays flat, the S&P will xxxxx xxxxx xxxxx xxxxx low around 3585. Non-subscribers, click here for access.
Meanwhile, an opinion I stated in June proved itself. Non-subscribers, click here for access.
6/6/23 Just imagine for a moment how bullish sentiment would become if the market tested the old high. The froth would be off the charts as virtually everyone would conclude that it was a new bull market. But without QE, it would not be. It would be a major top to end a cyclical bull market within a secular bear market. Non-subscribers, click here for access.
We’ll leave that determination to technical analysis. For our purposes here, the current liquidity tableau simply doesn’t support a long-term bull trend. But neither does it rule out an extension of the current rally. Non-subscribers, click here for access.
By July, Wall Street had turned bullish. Even the long-term technical indicators that I follow looked bullish. But these liquidity indicators were flashing red, which I noted in reports in August and September. Non-subscribers, click here for access.
The conditions that led to those red flashing lights have not been corrected. Non-subscribers, click here for access.
Such liquidity indications tend to precede long major cycle swings in prices. In that respect we are probably in the first stage of another major cycle bear market within a secular bear market similar to the late 1960s to 1982 and 2000-2009. Non-subscribers, click here for access.
Here’s the supporting evidence including charts showing exactly why we should expect this outcome. And I’ll tell how I’m looking at it tactically and strategically for your consideration. Non-subscribers, click here for access.
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