liquidity cycle

[thriftybob]

If anyone is still expecting average Joes to come out of the woodwork and jump into the market, I think they are wrong.

Average folk these days are buried in debt, just trying to feed the SUV, buy food, pay taxes, and make the mortgage payments. They are saving, via 401k and IRA accounts, but other than that, they have debts, not savings, and therefore would have a tough time coming up with additional money to invest now that the housing ATM has been shut down.

Of those that did, I'd expect Cramer has suckered them in by now.

That means its just the hedge funds and private equity that are left to fuel the market with their leveraged money.

I don't think we are in a recession, now, but I think we will be by fall. In a few weeks we will hear Q3 outlooks, and know if the slowdown's already begun or not. All these added costs and no wage hikes have to eventually result in reduced spending, and that in turn would result in reduced domestic sales and profits, I'd expect.

 

[TGregg]

That's what I keep waiting for. Fer crying out loud, gas has doubled in a year! That's gotta be a serious impact on inflation and then everything else especially with an Energizer Rabbit Money Supply that keeps on going.

The only thing I can think of is nonUS countries sucking it up to try to keep the global economy floating.

Remember those old commercials about how it wasn't nice to mess with Mother Nature? That's what it's like when countries mess with the free market. Could be trouble.

 

[JamesVU2000]

There is no doubt that the massive presence of foreign CB's in a variety of asset classes is distorting everything. No one ever mentions the fact that foreign holdings of treasuries and agencies is still on a accelerated pace. It hasn't slow down and has gotten even stronger in the last year. How long can the PBOC, SAFE, and BOJ continue proping the current monetary system is the trillion dollar question. Unfortunately, as George Soros and the japanese banking system proved, imbalances tend to get unwound and prolonging them makes it worse.
Real Estate is a horrific bubble and the quicker we revalue and deal with the pain and fallout the better.

 

[dtrader98]

Found some nice stats and charted distribution. If I am interpreting correctly, we are about 4.5 yrs into current bus cycle expansion (give or take, depending upon if we are in contraction yet), which is well approaching the tail end of the curve. Can't nail down specifics, as recessions aren't called until after the fact. Although, another interesting observation -- you can't see it on this chart, but the smoothing curve for periods of expansion is growing exponentially. Good news for bulls at least.

I'll try this plot once more:

<br />
<img src="http://elitetrader.com/vb/attachment.php?s=&postid=1511934" border="0" alt=""><br />

 

[dtrader98]

Thought it would be interesting to curve fit s&p 500 Yearly returns with a sin envelope. Trajectories fit nicely on negative slopes.

<img src="http://elitetrader.com/vb/attachment.php?s=&postid=1518475" border="0" width=560 height=245 alt=""><br /></font></p>

 

[dtrader98]

Cycle has been extended further backwards. Also, a plot of compounded price was added to see how it corresponded to long term S&P price chart. Notice that one period is about 40 yrs. Also, on the downtrend of the sine curve, the years tended to be sideways.
While during uptrends, years tended to increase. Without, doing further investigation, the cycles tended to correspond rather nicely with price chart. Also, notice it's a little early to call exact tops. Keep in mind the sine envelope, while objective, has been fitted subjectively.

<img src="http://elitetrader.com/vb/attachment.php?s=&postid=1519509" border="0" alt=""><br />

 

[dtrader98]

Ok, so here's a comparison of 87 %gains to today's running one yr gain.

The magnitudes are quite different. S&P 87 gained about twice as much in the same period (as seen on the right scale).

However, considering the quote I gave from larry williams earlier on COT behavior in 87, and the behavior today, I have to say, I'm seeing some pretty eerie similarities. The small guys haven't quite been sucked in yet
(they are getting there slowly), but the hedge funds have been promptly getting the spoon out of dodge over the past few weeks.

All it takes is for the mighty commercials to pull the plug, and that 87 volatility scenario doesn't seem too impossible to conceive. Could also turn out to be 95 action. Don't know, but the economy doesn't seem to be screaming 20 more years of low interest rates.

<img src="http://elitetrader.com/vb/attachment.php?s=&postid=1529891" border="0" alt=""><br /></font></p>

 

[dtrader98]

In pursuit of being objective, I'm also submitting a chart with equal vertical gain scales. Don't want to be too misleading on the prior chart.

<img src="http://elitetrader.com/vb/attachment.php?s=&postid=1529958" border="0" alt=""><br /></font></p>

 

[dtrader98]

Pretty interesting similarities (purely subjective rorschach visual mind you). However, I am having a hard time convincing myself this is the big one. Commercials haven't pulled the plug yet. Get that nagging feeling that this just might be a short term buy here (get those stops in place). That volume on the distribution side is pretty large.
Could very well be commercials have switched sides, if that turns out to be the case... Look out below.


Side Note. Just looked at nasdaq mechanical stops. Cut through 3 ATR chandelier stops like a knife through butter. A lot of mechanical systems got stopped out adding to the fuel. This happened in feb at last drop, but market rebounded.





<img src="http://elitetrader.com/vb/attachment.php?s=&postid=1545711" border="0" alt=""><br /></font></p>

 

[dtrader98]

Here's an interesting look at vix and S&P500 from 02- present vs. how it looked for comparable period in 90 to mid 90s, notice the similarities in the vix activity as s&p headed into mid 90s.

Also, keep in mind the sudden volatility didn't portend a sudden crash in s&P500, quite the opposite. Not sure how all this ties in to potential recession/ liquidity cycle leading my discourse on this thread.
But I think it should serve to add some caution on the emotional shorting activity that follows volatility spikes.

S&P has a long way to go up, when viewed in this comparison (although, like any other visual rorchach, it is one of many subjective views). And seeing as commercials are still massively long, I'm not ruling out this scenario. The other thing I've mentioned in other posts, is that fed usually cuts ONLY after a significant pullback in the markets, which we may be seeing before the year ends -- and pundits (fed fund contracts) are pricing in 100% rate cuts since I last checked.
Fed rarely disappoints the polls on this.

Could be more sharp volatility in aug-->oct then rate cuts, and continued climb up scenario tracking similar performance to chart overlay.


<img src="http://elitetrader.com/vb/attachment.php?s=&postid=1549041" border="0" alt=""><br /></font></p></font></p>