I have been a student of the stock market for 45-years, and I continue to learn. The stock market is, at once, both a simple system and the most complex system we have created.
It is the most complex system because, not only do we not understand how all the variables interact with each other, we don’t even know what all the variables actually are. We do know, however, that most of the variables are individual sentient beings who can change their behavior according to the information-content in the system, which itself is always changing.
The stock market is a simple system in the sense that there are only two constants: fund-flows and the emotion of fear. These two drivers of the market always move the market in a predictable fashion, although there is often a lag and random noise that comes into play. In the long-run, however, the market always moves according to the fund-flows and according to the herd’s fear response.
In this piece I present the fund-flow part of my most recent weekly summary.
Compared to fiscal-2023, the fund-flows in fiscal-2024 are significantly higher:
- +$60B in net-transfers for the month of December, compared to +$47B last December.
- +$391B so far this fiscal-year, compared to +$365B last year at this time.
The chart below demonstrates how the SPX has a negative correlation with the Federal spending-deficit; as the deficit increases (gets more negative) the SPX gets more positive (green arrows). And when the deficit is reduced (gets less negative), the SPX pulls back (red arrows). The fiscal-2024 deficit is increasing (more negative) relative to last year (black arrows) and the SPX is reacting higher as expected.
As was the case last year, the SPX has over-extended itself relative to the net-transfer rate; The SPX is above the $3T/year net-transfer rate (black line below) and we expect that it will move lower, closer to the $2T/year rate (green line) like it did last year; the mid-January tax-take could provide the excuse for a pullback. However, the underlying market structure remains strongly bullish.
- The 20-day average of the daily net-transfers is +$5.67B/day which is very healthy compared to -$1.0B/day at the same time last year.
- The Treasury General Account balance is $300B higher than it was last year (black boxes on the TGA chart below); this represents potential increased future spending which corresponds to a higher stock market.
- The mid-January tax-take could provide the excuse for a short-term pullback in the SPX.
Bank credit, the other source of liquidity, was decreasing during 2023 until October (start of fiscal-2024) and has been rising ever since. It remains to be seen if it will continue to increase since the first quarter of the calendar-year tends to weaken bank credit temporarily– 2023 was unusual because the credit pullback lasted all year, so perhaps 2024 will see bank credit not weaken in the first quarter.
Our liquidity model has been increasing steadily since October (except for a small dip the week before last).
The reverse repo model made a low (green box) a couple of weeks ago and we expect the SPX to make a low in the next two weeks.
Investors should have an opportunity to “buy-the-dip’ over the next two weeks.
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