Current lull in stocks not over, but likely short lived
The current downtrend in stocks (currently down 3.6% from all time highs as measured by the S&P) is not over yet, but it is likely short lived. I say "likely" because it all depends on the next 5 weeks. As I covered at TheStreet on August 4:
Before fundamentals, technicals, interest rates, sentiment or anything else, the bottom line of why stock prices go up or down is money supply.
If money is available, one of the places it can go is the stock market. That is a necessary but not sufficient condition for the market to rise. But if not enough loose money is available, all the fundamentals and technicals in the world won't matter. The market has to go down.
That is why the most important statistics to follow with regard to market trends is money supply. There are several measures for this, but the most prominent are the M1 and M2 numbers published by the Federal Reserve every week.
So let's take a look at the last money supply numbers and crunch the possibilities.
If we look at the one-week M2 average, non seasonally adjusted, we are left with 11,348.9 This is the 8th number in the 11,300's, which was first breached in June. It looks like we are steadily above that number. As the weeks move ahead, the smaller numbers on the table before June 2 will start disappearing (the previous 5 weeks), which will raise the quarterly average as measured on the table above.
The new table will be published at 4:30pm EST on the Fed's website. If the new week-average shows a number that breaks below $11,300, it would be a strong signal that the money supply lull is a real one and the decline in stocks will likely get much worse. If it stays stable in the mid $11,300's, then the average will pick up slowly, given that the earlier week-average numbers below $11,300 on the table will be off the grid.
If the number published at market close tops $11,400, that would be a strong signal that the lull in money supply is over and we are back on our way up. In that case, the current mild decline in stocks should be over, barring a sharp drop in M2 in the coming weeks.
I am leaning towards the number being higher to stable, and that is because of the seasonally adjusted week average, which is consistently growing (see table). I don't know the formula that the Fed uses for calculating seasonal adjustment for the M2 supply, but I assume that the current low growth rate of the non seasonal number has to do with seasonal factors, whatever they are. Otherwise the seasonally adjusted numbers would also be stagnant. They are not.
Bottom line: If the week-average non seasonal number breaks below $11,300, buy some SPY and QQQ near the money puts going out 3-6 months. If the number is stable, do nothing and wait for next week. If it breaks above $11,400, cover any shorts and buy the next dip.
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