Liquidity

March’s mad dash for cash didn’t stop with rates/credit/FX markets. Among equities, there was also a strong preference for cash liquidity. The market rewarded companies that had strong cash positions and punished those without—which explains why traditionally defensive styles actually underperformed.

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Based largely on the bearish trends in our monetary and liquidity measures, we were correctly negative on stocks throughout most of 2018. It’s therefore especially painful for us that 2019’s market rebound has been credited almost entirely to the “pivot” in most of those measures.

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We’d concede the monetary backdrop for stocks is now mixed, an upgrade from the almost uniformly negative environment of last fall. On the negative side, the U.S. yield curve inversion has now persisted long enough that even the economic optimists are getting nervous.

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The December employment report temporarily eased fears of a severe U.S. slowdown. That’s a mystery to us.

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The consensus focus all year has been on the boom in U.S. corporate profits.

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Whatever one’s preferred leftovers from yesterday’s feast, the odds are good you’ll find them more appetizing than the slop served up by global asset markets this year. Stocks have obviously been turkeys, but all the surrounding trimmings that help diversify a portfolio have proven anything but complementary to the main course.

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Regardless of how it’s measured, the liquidity available for global stocks continues to run off.

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Question: How can you be cautious on the stock market with recent earnings results so spectacular?

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Our shortest-term put/call measure has yet to reflect the level of fear usually triggered by a correction of this size. Meanwhile, the market setback has done almost nothing to stymy the optimism of either market newsletter writers or mutual fund timers.

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The first few trading days of the new year have been a seamless extension of 2017—a low-volatility, “measured” market melt-up.

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While investors look high and low for signs of excess that might portend the next bear market, they should pause and consider the excesses that have recently gone away.

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The Major Trend Index stabilized in a moderately bullish range during the past several weeks, yet the Momentum/Breadth/Divergence category is almost the sole carrier of the bullish torch.

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Deteriorating stock market breadth and worrisome leadership trends both suggest liquidity has already tightened; whether the Fed follows suit in September may now be just a formality.

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Extreme market viewpoints get the headlines, but it’s baked into our disciplines that we will (occasionally) be noncommittal.

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The recent strength in the dollar coincided with a spike in volatility and weakness in risky assets, but the relationship over the last couple years has been tenuous at best.

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What worked, what didn’t; what you need to consider for investing in Emerging Markets this year.

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Helping propel the stock market recovery has been a build-up of excess liquidity. This has now generally been put to use, and can no longer be counted on as a market driver.

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Our broad read of the stock market is still bullish, but we can’t help noticing that the concerted effort to supercharge the economy via liquidity may be losing some steam.

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What will be one of the key performance drivers for  the second half of the bull market? The short answer is the same catalyst that brought the stock market down during the latter half of the last bear market: Liquidity.

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Using the ratio of MZM relative to total stock market capitalization as a gauge of market liquidity, shows there is a lot of fuel that can be put to work to drive a stock market rally.

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