Lee AdlerThe good news is that the 9-12 month cycle projection no longer points toward 1700. The outlook will remain bullish if certain things happen this week and next.
Yesterday we looked at the overview of the CLI and the issue of new and secondary stock offerings. The CLI is still bullish. And the supply of new stock issues has not been sufficient to absorb enough of the demand to stop the advance of stock prices, although it has probably contributed to slowing the rise. Likewise, new corporate debt issuance, while massive, hasn’t been sufficient to pull enough of the demand for securities to cause a reversal of the rise in stock prices.
In this Part 2 of the report, I cover the remaining interesting and important indicators that comprise the CLI. Each has its own story to tell, but they all lead to the same conclusion. Still bullish, and, unbelievably, one key component says that the stock market is oversold.
I find it difficult to wrap my head around that. But I won’t argue with it. If there’s one thing I’ve learned in 53 years of watching markets virtually every day, it’s not to argue with impartial indicators. They don’t care what I think should happen. They just show what is happening.
So here we are. The Fed is creating enormous amounts of excess liquidity, “liquidity” being a fancy word for “money.” I use the words interchangeably.
The Fed is creating that excess by pumping money directly into the markets via its POMO operations—buying bonds from Primary Dealers and paying for them by crediting the dealers’ accounts at the Fed with newly imagined money. That leads to secondary effects of increasing money in the system via credit growth, particularly increasing margin credit that results from rising securities prices.
This works, and will continue to work, for as long as the players have enough confidence in the game to keep buying. This keep pushing prices higher, increasing the value of collateral. That, in turn, allows for and promotes ever more credit creation. It’s the quintessential nature of bubble finance. Circular, and more. Always more.
There are those who say that this isn’t sustainable. There are also those who say that an expanding universe isn’t sustainable, that it will collapse in on itself.
In a few trillion years.
I’m agnostic about whether this must finally end in collapse within the foreseeable future. I assume that it will, but I sure as hell don’t know when. So I’ll just operate in the here and now, and respect the trend. We’ll always be alert for signs of change, but at the same time, never forgetting Rules Number One and Number Two.
Don’t fight the Fed.
The trend is your friend.
Meanwhile, as Yogi said, you can observe a lot by watching. I’m confident that by always being vigilant, and open to anything, we’ll be ready just in time to take advantage of, or at least protect ourselves from, whatever is to come.
Now to the indicators.
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Cyclically, there’s no reason to get bearish here. Cycles of up to 6 months duration remain in gear to the upside. A 4 week cycle high is due now, but it won’t matter if the 6-8 week cycle is dominant. Here are the price targets and theoretical timing of these expected moves.
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Are You Kidding Me?
Can this be right? Did the stock market become oversold in mid October versus Composite Liquidity. This chart said that it did. And even after this huge 2 week rally, it’s still much closer to oversold than overbought. The S&P 500 is still near the bottom of the liquidity band.
It’s very similar to a look it had in July 2011. That preceded 4 years of a relentless, virtually unbroken bullish string.
What should cause us to expect change?
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This is Part 1 of a 2 part report. Part 2 will be published later today.
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In the second month of each calendar quarter the US Treasury gets together with a shadowy group called the TBAC, which stands for Treasury Borrowing Committee of the Securities Industry and Financial Markets Association.
The Treasury tells the TBAC how much money it will need to borrow to pay its bills for the rest of the current quarter and the subsequent quarter. The TBAC tells the Treasury how to schedule it. In other words, it sets out the type of issuance and the timing for the rest of the quarter and the next one.
In case you’re wondering, here are the current TBAC members. They change from time to time.
I just note that the Vice Chair is good old Brian Sack, who ran the NY Fed trading desk for several years. He was the guy who was in charge of executing the Fed’s trades with Primary Dealers in implementing QE. Now he’s making the big bucks on Wall Street as a “global eConomist.”
How would you like to be the firm that snagged him and his insider connections at the Fed? I wonder what that cost them.
But I digress.
The TBAC’s quarterly borrowing schedules are central to us because they tell us the schedule of expected new Treasury debt issuance (supply), months in advance. In the good old days, before pandemics and debt ceiling crises, that was extremely useful information to have because the Treasury rarely digressed from the TBAC schedule.
That has changed during the last couple years of the Trump Regime, because the mechanism for being able to reasonably forecast the Treasury’s borrowing needs broke down. First, they broke down because the Regime wanted to manipulate Congress by using the Federal Budget as a cudgel. Then things got worse when the pandemic came.
Last week the TBAC issued its revised estimates for the current quarter, and its first stab at Q1 2021.
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We aren’t out of the woods. There are signs that the 9-12 month cycle down phase could be much worse than I originally had hoped. This includes a new downside cycle projection that won’t make you happy, unless you want to accumulate at lower prices.
Short term cycles turned up on schedule, triggering the overdue upturn in the 6 month cycle. The 13 week cycle up phase got its expected second wind. All cycles from 4 weeks to 6 months are now in gear to the upside. The 4 week cycle currently projects to 3560. The 13 week cycle points higher–a lot higher.
Chart pick performance was strong last week. The average gain grew from +2.5% to +5.0% while the average holding period fell from 14 calendar days to just 8, or barely over a week. Our shorts got stopped out early, protecting a small net gain on those, on balance. Meanwhile the long picks were able to take advantage of the market surge.
I am adding 6 picks to the list as of Monday including 3 new longs and 3 new shorts. I am closing out one pick. With these changes, that will leave 10 open picks, 7 longs and 3 shorts.
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Wouldn’t it be nice to be able to generate a 5% gain every 8 days? Obviously, that’s not going to happen. But the plus signs are nice. Of course, we’d like to beat buy and hold, too.
A long/short trading strategy won’t do that in a broad, sharp rally like last week’s. That’s because we always have at least a few shorts. That costs us when we have a straight up week in the market. If we consider the last 8 calendar days as a basis for comparing performance, we were about 1 percentage point below a buy and hold SPY strategy.
But always having a few shorts means that we should outperform rangebound and down markets. My technical stock screens will generate lots of shorts when the market is trending down, and hopefully my eyes will recognize the best ones from that group. The goal is that when the market trends down (someday), the chart pick list should not just massively outperform a buy and hold market strategy, not just by losing less. It should be positive on balance.
Another goal I have for these weekly chart picks is for it to be easy to follow. Once a week entries obviously aren’t optimal from a market performance standpoint. But for busy people, it’s a good alternative. We generally have a few picks each weekend that we can enter on Monday morning. Then, setting trailing stops frees us from the trading screen. We can go about having a life!
But I don’t like automatic stops. What about the use of mental stops? I usually put stop levels on the chart pick table. I set an alert to be sent to my phone and computer screen at the stop level. When I’m actively trading my own account, I use a chart trendline or moving average representing my trailing stop line. When I get that alert, I get on that chart quickly. I wait that 2-3 minutes, and if there’s no reversal, I trigger the trade and move on.
Again, this is just my way. I’m sharing it with you for informational purposes. You have to do it your way. I just try to give you useful, actionable, and hopefully profitable, information for you to use as you see fit. If you are not an experienced trader, consult a professional investment advisor for guidance. That’s not what this is.
Past performance doesn’t indicate future results. There’s always risk of loss. Chart picks are theoretical for informational purposes only.
Tax collections improved in October, but are still well below pre-pandemic levels. The US may look like it’s recovering, but it’s still in the hole it dug when Covid19 first hit. That means that Fed policy isn’t likely to change any time soon.
And it also means that we should expect a stimulus package of some kind, at some point. With the uncertainties surrounding a divided government regardless of whether a new Administration takes over, guessing how much stimulus there will be, and its timing, is a fool’s errand. The one thing that we do know is that whenever it comes, the bigger it is, the more bearish it will be.
And if they spend the $1.7 trillion on hand mostly to pay down debt, that would be very bullish.
Meanwhile, economic data is useful for guessing what Fed policy will be, and under normal circumstances might be useful for making an educated guess about fiscal policy. It’s not possible to translate this data directly into an expected market outcome. It always comes down to measuring the strength and persistence of the trend through technical analysis, and more direct liquidity inputs, such as the PONTs. That’s essentially the difference between the quantity of Fed QE versus the amount of new Treasury issuance.
This data gives us an outline of where the economy really stands, and what it means for the outlook for stocks and bonds.
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There were some positive signs for gold last week and they are coming at just the right time.
We’ve had two working theses over the past few months. One is that the Fed is no longer pumping enough cash into dealer accounts to keep an endless bull trend going. Instead, at best, there’s only enough for rotation between stocks and bonds.
The second thesis was that because dealers are so leveraged, any fall in bond prices, reflected in an increase in bond yields, would mean big trouble for the markets. Based on technical analysis, I guessed that the Maginot Line for the bond market was 0.80 on the 10 year Treasury yield.
It’s early yet but, last week we saw evidence in the stock market that these theories are working in practice. The 10 year yield traded persistently above 0.80, and stocks sold off.
Not only wasn’t there rotation, where selling in one market translates to buying the other, but both markets were weak. The selling was contagious, leading to net portfolio liquidation, losses, and equity destruction. This increases the danger of margin calls, which can become self-feeding.
The big question is just how much pain will the Fed tolerate?
Because more pain is coming. A lot more.
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