Liquidity Trader

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.

You have probably seen the reports about how a community of traders on Reddit is gaming the short side, madly buying call options on stocks that are heavily shorted. This forces options market makers who are writing and selling the calls to them to hedge by buying the underlying. These actions have resulted in ferocious short squeezes.

We all know that story with TSLA. But the poster child lately has been GameStop (GME), a struggling retailer whose stock was $4.00 a share, six months ago.

(Sorry about the busy-ness of this chart. These are what I use for my own trading and for stock picks in the technical trader. They are much larger in my charting program, so the detail is clear).

So the game now is to simply buy stocks of heavily shorted, troubled companies. The worse the fundamentals, the more bullish it is.

Alas this isn’t new. There are whale speculators who have made lucrative careers of just engineering short squeezes. The difference now is that the public is in on the game.

So not only are we dealing with dark matter, we’re dealing with a parallel universe that operates in reverse of what we consider normal.

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.”

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This was inadvertently posted a moment ago with the wrong headline and post link. Sorry for the error!

Macro Liquidity continues to bulge. The stock market has followed. It became oversold versus the surge in liquidity that the Fed initiated in March 2020. And it hasn’t looked back since. Should we expect to see stock prices become overbought again before the next big crash?

Stock prices have caught up with liquidity but with liquidity expected to continue rising stock prices could continue to rise along with it.  But the balance is shifting and we may not need to see Overbought again on this chart before the next crash. Here’s why, and how I’m approaching it.

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Both bonds and stocks have weakened over the past 2 weeks. It’s a sign that the Fed isn’t supplying enough QE.

We’ve known for a long time that it wasn’t enough to support twin bull moves in both asset classes. Have we reached the tipping point where it’s insufficient for either to move higher while the other descends?

The answer, my friends, is blowing in the wind—the wind of margin calls now blowing through dealer balance sheets as leveraged fixed income positions continue losing value.

Meanwhile the $2.9 trillion Biden stimulus proposal may boost the US economy, but it will be a disaster for the increasingly fragile stock and bond markets. Here’s why, and what you should do about it.

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We have a little tightness in the market at the end of every month. That’s because the Treasury issues a big wad of TP and the Fed isn’t there to absorb it. The Fed is just doing its piddly little $20 billion a week of Treasury purchases, and the Treasury is slugging the market with $100 billion or so of new supply.

Last week the actual numbers were worse. The last QE injection was $6 billion on December 23. They then didn’t do another one until Monday January 4, with $8.8 billion. Meanwhile, the Treasury plopped $164 billion in new supply on to the market on December 31.

We got through the deluge relatively unscathed. But there’s a lot to look forward to for the rest of the month.

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