As I put my head on the pillow last night, I continued to sort through thoughts from last night's Wrap. I'm usually guilty of always trying to prove or disprove a theory/scenario to make sure I'm on the right track. Is there a loophole in last night's wrap? Is/has the dollar/bond trade really been pumping liquidity into economy?
"Aha" I thought to myself, as I almost got out of bed. What about the money supply? You know.... that very "boring" class we may have taken in high school or college and macro economics. One of the test questions on every final was to explain the differences between M1, M2 and M3 money supply.
But deep sleep and a goodnight slurp on the nose from the dog had me totally forgetting about the possible answer to my query.
Until 02:37 PM EST when Ron Insana from CNBC reminded me of the sharp gains that have been seen in the money supply!
And here is where I bring some closure, or at least have some confidence in what has happened, and what we need to follow on a larger scale in coming weeks and months as it relates to the dollar/bond trade discussed last night.
I'm not going to go into great detail, but for those interested like me, then here's a quick recap of macro economics 101 and money supply.
Here's a neat little table that I found that quickly explains the various aggregates of money supply. This is data as of October 2002, but I've also found a couple of sites where trader/investors can get current data too. This October 2002 time period is nice as it shows money supply at an extreme stock market low point.
M1, M2 and M3 money supply
If you don't have www.investopedia.com in your browser favorite lists, you might want to. It is like a financial/investment dictionary. If you don't understand an investment word, just type it in and see what their dictionary/encyclopedia spits out.
For the most part, M1 and M2 are the money supplies that are more "consumer related" as it would be tied to you and I the consumer.
The M3 would include the "money on the sidelines" we so often hear about in the papers or TV on "institutions are sitting on a lot of money that's waiting to be invested."
With a brief view of how M1, M2 and M3, I then found a neat site at http://www.marketvector.com/leading-indicator/m3-money-stock.htm
The link just given provide a little graph of the M3 Money supply. They evidently have some type of formula for trying to forecast future trends too. If you look to the column on the far left of your browser (once you click the link above) you'll see all kinds of different "economic indicators" that will allow you a visual presentation (including M1 and M2).
For you "raw data" traders/investors, you can get weekly money supply data directly from the Federal Reserve at this http://www.federalreserve.gov/releases/h6/Current/
Federal Reserve Data for M1, M2, M3 (seasonally adjusted)
Here's the data I needed to see, to make sure I wasn't making up some unbelievable type of scenario in last night's wrap. At least I think it is.
My time of focus is at the bottom of the table. While the May data is (p) preliminary, do you see the percentage increases in M1 and M2 in April and May? This is about the time we began noticing the divergence between Treasury YIELDS and stock prices. For me (Jeff Bailey), this gives me some confirmation that the dollar/bond relationship is indicative of M1/M2 money supply builds, which may indeed have had the stock market accurately ANTICIPATING greater liquidity, that may indeed stimulate the economy.
On the above table, you will also see (in red) where I've marked the various FOMC rate cuts that have taken place since June 2001. For instance, in June of 2001, the Fed cut rates 25 basis point to 3.75% and continued an easing policy at the August meeting (FOMC doesn't meet in July), and when the terrorist attacks on the United States on September 11, 2001, the FOMC began getting more aggressive with a string of 50 basis point cuts to really try and pump liquidity into the markets.
Now, Mr. Greenspan is a lot smarter than I am, but if I were the Fed, and simply looking an money supply, do I need to cut interest rates right now? Is the Treasury either buying back its debt to pump liquidity into the markets instead of using rate cuts? If not, then Mr. Greenspan's comments and Treasury Secretary Snow's comments about potential buybacks looks to be doing the job as it relates to money supply doesn't it?
So where is this taking us?
I think, if there's any rate cut next Wednesday, its only going to be 25 basis points.
Why? If I'm Mr. Greenspan, and I've got just 1.25% to work with (potentially just 5 25 basis point cuts) and the stock market has been doing well, then I would only cut 25 basis point here, but only for consumer's psychology.
I doubt that Mr. Greenspan looks at the various bullish % charts, but I know, that at some point, the MARKET is going to begin removing risk from equities, and there's nothing the Fed can do with interest rate cuts to prevent it.
In fact, I don't think that the bulk of economic data released at this point is going to have much impact, other than eventually play a role in how sharp or fast the eventual removal of risk will be.
One piece of economic data that I didn't cover today, was the May Treasury Budget, which grew to a $90.5 billion deficit, which was well above the April -$80.6 billion level, but inline with economists' forecast of $90.0 billion. This increase is easily tied to the war with Iraq.
The stock, bond and U.S. dollar all reacted in unison to the 12:00 PM Philadelphia Fed report, in a rather defensive manner. Stocks and the dollar saw selling while the longer-dated 10 and 30-year bonds found some defensive buying.
Where I see some DIVERGENCE from that pattern intra-day is when the Treasury budget was release. Stocks continued lower at the 02:00 PM release, but both the dollar and longer-dated Treasuries responded somewhat differently.
Both the 10 and 30-year found selling at the 02:00 PM EST mark, but the dollar, as depicted by the U.S. Dollar Index (dx00y) actually found buying from 93.09 and as I type, trades higher at 93.25.
Now, it might make sense that a rising deficit is troubling to the Treasury bond market, and we might expect expect to see a longer-term government debt instrument find some selling, even though the deficit was accurately forecasted by economists and no real surprise. I say there was no real surprise only because the dollar, which actually would be used to pay the interest on the bonds, showed firming.
While I can't say that today's trade lower in equities was entirely Triple Witching related, (the major indexes did see a quick decline from the June Philadelphia report), the weakness in the financial sectors from the getgo this morning is concerning to bulls. And not just S&P 500 (SPX.X) 994.70 -1.52% and S&P 100 Bulls (OEX.X) 501.76 -1.54%.
I took some time above to sort of complete last nights wrap, so that I could get the bullish % readings.
The "major" change today was that for the first time since reversing up into "bull alert" status in March, the NASDAQ-100 Bullish % ($BPNDX) reversed back lower to "bull correction" status, as it saw a net loss of 4 stocks to point and figure sell signals and has the bullish % now at 81%.
NASDAQ-100 Bullish % ($BPNDX) - 2% box
Without even looking at a Point and figure chart of the NDX or QQQ, I would immediately be looking to have a portfolio currently holding 100% long, to get to 75%-50% long and 25% short. If risk averse and 50% long, then 25% cash. This would be my type of weighting at this point as it relates to the bullish % and a portfolio management type of allocation.
Now, the NASDAQ-100 Bullish % was the first bullish % to reverse up in March, and it has also been the bullish % to reach the highest level of bullishness.
What we must understand at this point, is that the bullish % for this index didn't just get a recent high reading of 91% without some type of bullish sentiment. And it would be my first thought that we would see some type of bullish % action, similar to that found at the far left of the chart, like that of December 2001. However, a strategy of holding at least 1/4 bearish at this point gives some hedge to a long portfolio, or for bears that have been biting at the bit for the past couple of months, some exposure should we see a more direct and pronounced removal of risk like that found in December of 2002. I'm also monitoring the NASDAQ new high/new low ratio and the 10-day average is still strong at 97.7%. The NASDAQ Composite saw 166 stocks trade new 52-week highs and just 4 new lows (Daily ratio is 97.6%).
For those that don't know, the point and figure charting systems uses the number 1-9 to signify charting entries that took place in January-September, while letters A-C signify October-December.
NASDAQ-100 Tracking Stock (QQQ) - Daily Interval
Expect volatility with tomorrow's expiration. I personally don't think the QQQ is going to just fall apart overnight, but the way the Biotechnology Index (BTK.X) 443.65 -4.57% has gotten hit the past, broader technology could get hit just as hard.
We should note that the biotechnology index and stocks within are not really "economic-related" stocks. We should also monitor them for a potential rebound as the BTK.X has declined 8.2% in just two days. If they recoup 1/2 of that decline, it could have the QQQ back at $30.83, a much more attractive bearish entry point.
S&P 500 Index Chart - 6-point box size
Here's our unconventional 6-point box scale of the SPX and today's action did see enough downside to find a 3-box reversal back lower. While Triple Witching knows no bounds, there should be good support above the 985 level with correlative matrix support of 988. Correlative resistance in the matrix can be found at 1,006.
Today's trade saw the broader S&P 500 Bullish % ($BPSPX) see a net decline of 0.6%, or 3 stock to new point and figure sell signals. This has the bullish % for this broader market indicator slipping to 81.04% after reading its bull cycle high reading of 82.83%. It would take a reading of 76% for this bullish % to reverse to "bull correction" status.
The narrower S&P 100 Bullish % ($BPOEX) saw a net gain of 1 stock to a point and figure buy signal! This has the bullish % right back up at Tuesday's bull cycle high reading of 81%.
Dow Industrials Chart - Daily Interval
On an intra-day basis, the Dow traded sloppy either side of its MONTHLY R2 of 9,214 from 11:00-03:00, but gave up near the close. I'm more tempted to buy the Dow on a decline back near the 9,031 level, which I think would only be achieved on some type of Triple Witch unwinding. Not saying it will happen, but I'd take my chances on a bullish trade, then be inclined to play an "anticipation" rebound move back higher to 9,200 "ahead of the Fed."
I also still think there's some fund managers out there that have money to put to work before the end of the month. If things get hit tomorrow near a good support level, with some upside to the recent highs, I wouldn't necessarily target the highs but target a reasonable type of rebound to a level of resistance. If I were a fund manager and had to put some money to work, I'd want a dividend.
Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU). Still bull confirmed at a cycle high of 83.33%.
Pivot Analysis Matrix -
I've quickly checked some of the correlation levels that I see.