The stimulus will hit the fan on Thursday morning as the estimate for 3rd Quarter GDP is released. Stunning growth is expected, on the order of 6% for the quarter, which will confirm that the "best recovery money can buy" is gaining some traction.
But the plot thickens on the hyper-stimulation story. The driver of this stimulus -- cheap and easy money and credit -- is suddenly not flowing as freely as before. Surprisingly, money supply has been contracting sharply over the last few months. This is definitely not in the Fed's plan. Yet nevertheless there has been an organic slowing of the monetary flow.
This is happening in spite of the Herculean efforts by the Fed and the Administration to bolster and stimulate. Has there even been one day in the last few months when some random Fed governor hasn't been out there talking up the recovery? This endless jaw-boning is now a major part of their tool chest.
To see this graphically, I'm going to borrow a chart from the fine analysts at ContraryInvestor.com. The chart shows a very simple rate of change calculation on M3 money supply growth. M3 is the broadest definition of aggregate money sloshing around in the economy. It's a measurement of things like currency and cash, money in checking accounts, money market funds, CDs, savings accounts, etc.
This chart is a bit of a shocker, for all those who think the liquidity bubble will go on indefinitely. After all, the Fed can only control liquidity and stimulus up to a certain point. It can print money and offer it cheaply to businesses and consumers, and of course it can also destroy the value and income earning potential of your saved cash. But the Fed can't actually make anybody spend that cheap and easy money.
Perhaps this chart is signaling the end of this hall-of-fame credit binge. Actually, it's more of a credit bender, with a nasty hangover looming out there at some point. We've been through that one before after the Y2K Millenium credit bender. With overall liquidity contracting, it's certainly going to be tough to follow up the 3rd quarter's blistering GDP growth (assuming no surprises on the expected big number this morning).
Traditionally there is a lagged effect in the way money supply growth and contraction percolates into the broad economy, and into the stock market. The stimulus from earlier in the year is now going to show up in the 3rd quarter GDP data, which implies the current contraction may be felt over the coming few quarters. The liquidity that everybody is counting on through next year's election has been drying up at an alarming rate, and the market -- as a forward-discounting mechanism -- may just be ready to start factoring in this surprising development.
As far as the current action, the market still looks like it can squeak out a marginal new high here, although it's got to get it done pretty quickly here, as time is running out for this short-term advance phase.
The S&P 100 (OEX) just put in a pretty decent hourly uptrend, stretching its fractal dimension down to 33 into the afternoon yesterday. That's the typical spot where trends generally need a rest, and interestingly, the trend stopped right at a declining tops line. I flirted with the idea of an OEX put position right at that line, with the trend at a natural exhaustion point -- but it's not in my rule-book to do a short position on trend exhaustion (except in certain special cases), as I've found it's better to hop on board the start of a nice new trend.
The important 150 minute chart also isn't quite ready, as it has a little congesting left to do before it hits "fully juiced up" status.
If we get a pop up on the ridiculously low VXO now -- it's at 17.15, a multi-year low! -- accompanied by some burgeoning down-trends on the 60 and 150 charts, then we'll be looking to jump right back in on speculative put positions in our options service, and possibly bearish Rydex positions too, in the Tempest (RYTPX) and Venture (RYVNX) funds.
If we do get that one more marginal high, I'll have much more confidence in pulling the trigger on a mid-term downtrend, which is perhaps counter-intuitive. But such a move to new highs will be completing a pretty clear fractal pattern to the upside, right at important bear market resistance levels. We'll want to go for it there, with a nice close stop to define our risk.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: Remained unchanged at 0% (completely empty).
SHORT-TERM: Continued its advance phase.
MID-TERM: Remained in Neutral at 91/9 with Confidence moving up to a bullish 4. While we record a 1-point move from 90/10 to 91/9 that's a function of rounding. The gauge actually moved only 0.3%. That's enough to give it an advance bias, but keeps it officially in neutral. With the VIX down at 16.43 Confidence will not go higher than 5, so it's all but maxed out.
LONG-TERM: Remained at 95% on the Advance side of the gauge with Confidence at a Bullish 5. Here too with the VIX so low Confidence will top out at 5.
BOTTOM LINE: It was just a year ago that we were writing with incredulity about how the VIX was staying at higher levels for longer than we had ever seen before. Now we are writing with incredulity about the VIX staying low for longer than we've seen in a long time. In the spring of '98 the VIX got this low but popped back up post haste. But from late in '92 through early '96 the VIX lived between 10 and 15 as the market ground steadily higher on low volatility.
Is that what's going to happen? I don't know. But I also don't know anyone who even thinks that CAN happen...which makes it an idea worth keeping at "simmer" at least on a back burner.
That said, with the tank at 0% we'll certainly keep an eye peeled for an SPX failure at 1054, the prior October high. For now Complacency continues its apocalyptic battle with improving near-term fundamentals and professional beta chasers.
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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