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OK. So maybe I was a bit too alarmist in my last post. It's a bad habit, but just how patient should we be with this market before we get out?
The truth is, not very.
Bulls have made money in this market for nine straight years. Nine years without a bear market! And now the Fed has loudly and specifically turned hostile to asset price inflation. It told us that it would pull the punch bowl. Then it told us that it is pulling the punch bowl. Then it started to pull the punch bowl. Now it is continuing to pull the punch bowl at an ever-increasing rate. And the U.S. Treasury is exacerbating that by doubling the amount of supply it is bringing to market.
As I said on Wednesday – it just does not get any more bearish than that.
Let's look at last Thursday's market rally in context… and make some money while we're at it.
Mr. Mnuchin's "Piggy Bank Raid" Drove the Market Rally – but It Won't Be a Long Ride
First of all, the narrative behind this rally was just a coincidence. Supposedly it was about great tech earnings. But as always when the market rallies, the cause was an increase in liquidity. In this case, it's a very short-term increase.
On April 19 I told you about all the cash that the U.S. Treasury had poured back into the accounts of dealers and institutions. That happens every April when tax collections roll in. The Treasury has so much cash that it uses it to pay down a few maturing T-bills, notes, and bonds.
It happens every year, and it gives the market a temporary boost. That maturing debt is held by dealers and institutions. They get their money back. It burns a hole in their pockets, so they redeploy it. Some of it goes to buy other bonds, notes, and bills, temporarily pushing down rates and yields. And they use some of it to buy stocks. Invariably stocks rally in April and often into mid-May.
As of April 19, the net paydowns since April 5 had totaled $125 billion. I thought they were done. But [Gomer Pyle voice] Surprise, Surprise, Surprise! Just for extra measure, the Treasury piled on a little bit yesterday (April 26). It paid down another $8 billion in outstanding Treasury bills. That brought April's total paydowns to $133 billion.
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You know the old story. A billion here, a billion there, and pretty soon we're talkin' real money. Well, make no mistake, $133 billion in a few weeks is enough to move the market, big time. And it did.
In 2017, the paydowns came later, from April 17 to May 1, and totaled a "mere" $100 billion. This year, Mr. Mnuchin (Gezundheit!) raided the Treasury's piggy bank and started those paydowns early, beginning on April 5. He used that piggy bank coin to goose the markets.
You don't suppose that he did that because on both March 23 and April 2, it appeared that the market was on the verge of crashing through the February lows, do you? No, they wouldn't manipulate the markets that way just to forestall a crash? Would they?
Hey, I just ask questions. I'll leave it up to you to decide for yourself whether it might be the case. I'll just try to give you the facts so that you know what to look for.
In any case, in this instance, $133 billion over the space of a few weeks was more than enough cash to burn a hole in the pockets of those dealers and investors who received it. Along with the cash raised in last Tuesday's market sell-off, it provided plenty of monetary fuel to drive a spirited rally in both stocks and bonds on Thursday.
Remember, this isn't just some money that amorphously and mysteriously happened to find its way into the stock market. This was cash that the U.S. Treasury PUMPED DIRECTLY into the trading and investment accounts of dealers and other investing institutions. There's no mystery here. This is cause and effect.
But it works in two directions, and this is where the gravy train ends. Today, April 30, the Treasury settles its usual end-of-month note and bond offerings. It will suck nearly $20 billion right back out of those accounts into which they just injected the $133 billion.
Clearly, most of that $133 billion has already been deployed. The April rally is clear evidence of that. But it ran out of gas on April 19, despite $43 billion in paydowns settling that day. Dealers and institutions can and do place buy orders in advance of receiving the cash from these paydowns. In the three days before receiving that cash, the SPX rallied 41 points.
And look what happened the week before that. There was a mammoth $64 billion paydown on April 12. The players holding the paper that was due to be paid off knew that cash was coming. From April 6 to 12, the SPX rallied 60 points. It sure looks like every billion in Treasury paydowns is worth an SPX point, doesn't it?
Now that the paydown game is over, will the market fall one point per billion of new debt issuance? Given the TBAC's published issuance schedule, and the fact that we know that the budget deficit has run $100 billion per month on average for years, it will only take 27 months for the S&P 500 to get to zero.
OK, so that won't happen, but under the circumstances, the odds favor something big and bad this way will come. This is no time to be complacent.
Let's tie all this to the technical analysis. Here's one of the technical cycle charts that I publish weekly in the Wall Street Examiner Pro Trader market updates. It's busy and complicated because it is a picture of lots of data. I won't go into all the detail here. I just will point out a couple of keys that I'm watching.
About the Author
Financial Analyst, 50-year charting expert, finance + real estate pro, and market analyst; published and edited the Wall Street Examiner since 2000.