Liquidity Surge Continued Last Week as Stock Prices Went The Other Way

Courtesy of Lee Adler of the Wall Street Examiner

Another week. Another new high in the composite liquidity indicator. But this time stock prices went the other way. Strictly on the basis of the liquidity trend, I am forced to conclude that this was just another instance of the dealers shaking out some inventory before marking them up and distributing them again.

The $10 billion reduction in weekly Fed POMO purchases went into effect last week but the dealers will still be getting around $70 billion a month from those purchases. Add to that the cash flowing into dealer accounts from the BoJ, and the rumblings that China is relenting on its tighter monetary policy, and that’s still a garishly tilted playing field.

While liquidity continues to surge, stock prices went the other way. For the past 5 years, whenever the liquidity trend has been this strong, stock market declines have been short lived, as the pressure of all that money jangling in dealer pockets eventually forces them to take on more inventory and push prices higher. I doubt that this time will be any different. At least so far, I can see little reason why it should be. Perhaps such reasons might become apparent to me in the weeks ahead, but right now, I don’t think much has changed.

However, I’ll keep a close watch on the technical indicators in the nightly market updates. They normally offer telltale signs ahead of any problems. Price patterns are the early warning signs of change, often before the reasons are otherwise apparent.

Get regular updates on the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE's Professional Edition risk free for 30 days!