Friday, April 1, 2011

4/1 1:30

The technical position of the U.S. stock market is reaching extreme overbought.  The next 2 weeks' data should be enough to throw the weekly composite to -16, the close-your-eyes-and-sell level.  Right now it is -13.5.
The monetary base, the "controllable" aggregate is accelerating to an upper bound that will demand restraint within the Fed.  The monetary base is composed of primarily reserves which are subject to the money multiplier, thus an acceleration of the base can lead to an explosion of the monetary aggregates.

Central bankers cannot afford to allow this potential M1/M2 explosion to occur.  The record prior to Ben was a 12% expansion that marked the 2000 market top.  Currently we are at 21% with another expansion to be added to the data this weekend.  QE2 directly adds to the monetary base by expanding the Fed's balance sheet.  Looking at the chart above one can see when and why Ben started QE2, because the base was naturally contracting due to lack of lending, reaching it's rate-of-change nadir mid-year 2010.  The entire world is freaking out with this program.
M1 has already peaked on a 1-year rate of change.  However, the Fed cannot assume that bankers will not start lending and increase the M1 multiplier.  Thus, the uncertainty principle should cause an early end to QE2. 
Here is a 4-week average of a 24-week rate-of-change in M1.  My analysis going back to 1965 indicates that a rate in excess of .05 is excessive and a return back below .035 brings trouble to the stock market.  It should be apparent how responsive M1 is to the monetary base and thus to FOMC operations. 

1 comment:

  1. Steve
    by my counts, we need one more new high either this month or next to set up everything going down in unison : small/mid cap hit the new high already, large caps and international need a new one I.e. Higher than Feb.