'Liquidity Jumping': Stock Market Update For The Week Ahead

The Past Week, In A Nutshell

What Happened: After auctioning to new all-time highs, U.S. index futures moved back into balance.

Remember This: “With Global Liquidity jumping by some US $20 trillion in 2020, or some 25% of World GDP, there is a lot to spend... Consider that following the 1930s Depression, it took roughly a decade to retain previous economic heights. After the 2008/9 GFC, the World economy clambered back after around two years. But it seems from latest data that it has taken barely six months to recover from the COVID Crisis,” said Michael Howell of Crossborder Capital said in reference to money being used to buoy the real economy.

“[T]he stark warning from history is that ‘… strong economies do not have strong financial markets.’ In other words, if money is being spent in the (virtual) high street, it is not being invested in stocks. Our bullishness about economies forces us to become bearish about stocks.”

Pictured: Profile overlays on a 65-minute candlestick chart of the Micro E-mini S&P 500 Futures

Technical

After participants established an all-time rally high in Wednesday’s session, the S&P 500 liquidated in regular trading, down to the micro-composite high-volume node near $3,667.75, a valuable price level. Thereafter, participants accepted lower prices.

In light of the mechanical trade (i.e., minimal excess at Friday’s lows) and poor structure (e.g., low-volume areas), it's very likely that the selling was the result of weak-handed, short-term buyers liquidating positions in panic.

Given that the higher-timeframe breakout remains intact, participants must monitor whether buyers surface at the $3,654.75 low-volume node and extend the range up to the high-volume node at $3,667.75. At that point, an initiative drive through that high-volume node -- the most positive outcome -- would portend a move to the $3,690.75 high-volume node, and then the prior all-time rally high.

Spending any considerable amount of time below Friday’s range puts the entire rally on hold.

Fundamental

In a Bloomberg commentary, Larry Dwyer of HSBC Holdings PLC HSBC was cited in a statement on his bank’s mildly bullish take on Treasuries, which puts the 10-year yield at 0.75% at the end of next year.

The Fed would have tightened only once in the past 22 years... or perhaps not at all. Under and AIT rule, the Fed should be dovish until inflation averages more than 2% for a period of years. In contrast, the consensus forecast implies the Fed is likely to be endorsing future tightening moves next year, or that the bond market will ignore the Fed.

Simply put, the notion that the Federal Reserve’s average inflation-targeting strategy will keep rates lower, for longer than expected, remains intact, drawing talk of inflationary expectations in the system. Still, the note comes ahead of the Fed’s upcoming meeting this week. It’s most likely that the market’s reaction to the event will be muted, absent a material change in policy (e.g., guidance on easing).

Key Events

Tuesday: Industrial Production, Foreign Bond Investment, Overall Net Capital Flows.
Wednesday: MBA Mortgage Applications, Retail Sales, Markit Manufacturing PMI, Business Inventories, NAHB Housing Market Index, EIA Cushing Crude Oil Stocks Change, EIA Distillate Stocks Change, FOMC Economic Projections, Fed Interest Rate Decision, Fed Press Conference.
Thursday: Building Permits, Initial and Continuing Jobless Claims, Housing Starts, Philadelphia Fed Manufacturing Index.
Friday: CB Leading Index, Fed Brainard Speech, Fed Bank Stress Test Results 2nd Round.