LIQUIDITY IS SENDING A WARNING
The following long term chart presents a simple model of liquidity (the ease with which companies are finding money) showed in red, and the EFA (represents worlwide markets ex-USA, but we could have exactly the same study and conclusions with the SPY). The blue line is a moving average of Liquidity.
On the chart we drew simple divergences at extreme points between Liquidity and the market. Liquidity is leading by some weeks: when the market makes a new high (or low) when Liquidity does not (has already a reversal) then the market eventually reverse.
We have to remind that rising stocks markets have to be fed somehow. If money is plentiful, part of it will find its way into stocks. If money is scarce, current companies and individual's needs come first, and there is no reason why new money should buy existing stocks. On the opposit, many market participants will have to sell stocks to make cash.
The second chart zooms on the current period and gives evidence of a sharp discrepancy between a falling liquidity and a market still sticking to the highs.
Not a trading system in itself, but a good help. No conviction of a continuation of the bull market before Liquidity climbs above the blue line. Conversely, every sign of weakness in the market has to be taken seriously when liquidity is trending down. In the current situation and if history is a guide, we will see at best some months of ranging market, with bearish implications if the supports we mentioned in our reviews do not hold.
More studies at www.tradingpulsealpha.com trading advice for beginners
More studies at www.tradingpulsealpha.com trading advice for beginners
