|
One well received explanation is that investors believe there should be an year-end rally this time of the year. As contrived as it may sound, it appears to be the only plausible explanation for such a strong rally in the face of flattening yield curves, rising interest rates, rising housing inventory, rising trade imbalance, rising political discords, and falling disposable incomes. But when a reason as contrived as this became widely acceptable, it should alert investors to be even more cautious. Instead, most analysts have now turned bullish and maintained that we're in a Santa Clause rally that should last into the New Year. As much as I'd welcome a strong Santa Clause rally, I can't pretend that I don't see all the technical and fundamental divergences, nonconfirmations, and market breadth weaknesses (Please see my last Sunday's Chartmentary and my regular Thursday Update). And, there seems to be more of them popping up everywhere I look. One of them is that lately the Fed seems to have started tightening the money supply. The Fed's repo activities have been in sharp decline since it hit the $53 billion peak at the end of August - see Chart 2. The $2 billion repo on Friday (not shown on this weekly chart) was the smallest amount since Aug. 16.
M3 aggregate money supply has also been in decline 3 weeks in a row (Chart 3). Last week, the Fed cut back $13.6 billion.
And, as I've shown you before, M1 has been oscillating sideways since it broke the uptrend in January. If M1 goes into decline, we'd be headed into a recession. The most recent longer term M1 decline occurred in 2000/2001. Last week, M1 dropped $27.3 billion, but the current trend continues to stay range bound. No downtrend has been established yet.
In addition to the money supply tightening, consumer borrowing (revolving and non-revolving loans) appears to be slowing down (Chart 5). After June's big increase of 8.4% from May, the growth of consumer borrowing has been in decline. The Fed's projecting no change (at 0%) in consumer borrowing in September (big red arrow).
Unfortunately, consumer borrowing is not the only borrowing that's slowing down. As I've pointed out in last Sunday's Chartmentary, the refinancing loan application volume has also been in sharp decline in the second half of the year. Recently, this refi volume has dropped 15% in just one month. The slowdown in borrowing will eventually curtail consumer spending. The spike in gasoline price caused by hurricane Katrina might have served as a wake-up call that alerted American consumers to start paying attention to their balance sheet. Finally, one way to see this recent rally as anything but a broad market rally is to take a look at this seldom seen market breadth chart that shows the percent of the Nasdaq stocks that are above 50-day moving average. The red line on Chart 6 is the 50% line. The market breadth is considered good when there are more than 50% of the Nasdaq stocks above 50-day moving average. It shows broad market's strong support for a rally. Last year's year-end rally was fueled by strong market breadth. That rally was led by the surging percent of the Nasdaq stocks above 50-day MA (blue line). Recently, the percentage has been staying mostly under 50% (black circle) while the market has been on a tear (blue circle). Unless the market keeps the momentum going, a rally with half of its stocks under their 50-day moving average does look quite suspicious.
CONTACT
INFORMATION The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
