The stock market has been on an amazing tear since December 26. The government shutdown (GSD) began December 22. Coincidence? No. I told you about the belated epiphany I had about this back on January 11:
But there’s one other thing that is bullish in the short run, and you’ll never believe what it is!
That short term factor is the government shutdown. That’s right. It’s bullish. Forgive me for telling you this only now, but unfortunately, it just dawned on me. I’ve been speculating about it for a week or so, but now the data confirms my suspicions.
This rally isn’t business as usual. It’s not about what the media is telling you: that the economy is fine, inflation is low, and the Fed will not raise interest rates as much as originally feared.
One thing is the same about this market, though. And that’s the underlying principle that drives all markets. The market has moved, as always, because of money. It’s pretty simple. When there’s not enough money around, the market declines. When there’s a surplus, the market rises.
Until December 22, there wasn’t enough money around. But then, something changed.
Since December 26, a tidal wave of money has sent the market surfing higher. That money isn’t coming from the usual source, the Fed and its fellow central banks. They’re going the other way.
Nope. This time it’s coming from the US Treasury. And this time is also different because the people controlling the money dynamics aren’t motivated by long term economic factors. They are motivated by politics. That makes this a whole different kind of ballgame than the one we usually play.
Here’s what it’s about, and what you can do to profit from it.
Since December 16, the US Treasury has paid off $107 billion in outstanding Treasury bills. That means the US government has pumped $107 billion in cash into the accounts of dealers and institutional investors, and in rare cases individuals, over the past 4 weeks. That’s as much per month as the Fed was pumping in during the height of the QE era.
It can do this because it is sitting on a cash hoard of $375-400 billion and the GSD has drastically reduced the government’s expenses. So the Treasury uses the cash flow from incoming tax payments to pay down short term debt.
When the Treasury pays off those bills the cash goes back into the accounts of the dealers and investors who had held them. That cash burns a hole in their pockets. With nowhere else to put this money, the erstwhile holders of the bills plow some of that cash into stocks. The Wall Street media has given them plenty of excuses to do that.
And so we have had a meltup in stock prices. That meltup faces multiple resistance lines around 2700. There’s no chart resistance indicated between there and 2800. So, if the market clears 2700, the next target would be 2800, and it would probably get there in the blink of an eye.
You can see on the long term chart that the range from 2700 to 2800 has been crossed multiple times in the past 15 months. Repeated crossings of a range cause a market to grow “thin” as longer term bids and asks within the range get filled repeatedly. That leads to the market easily crossing the range in both directions. The real test of the trend happens when prices try to break out from the range.
Meanwhile, it’s like Vegas. What happens in the range, stays in the range. It means nothing to the big picture. It may feel like we’re back in a bull market and that it’s going to the moon, but it’s merely rangebound noise. The positions of the technical indicators suggest that this is nothing more than an intermediate term rally.
Normally, after a bear market has its initial breakdown, there’s a recovery to the point of the breakdown, and then the downtrend resumes. The breakdown area usually represents a wall of supply that’s sufficient to absorb all of the buy orders and cause a downside reversal. We call that “resistance.”
That first resistance level on the way back up was 2550. Last week I told subscribers to my Wall Street Examiner Pro Trader reports that if the SPX clears 2550, SPY calls would be a good play to capture more upside. But is it now wise to still try to catch this moving train?
My answer to you would depend on whether you want to trade the short term in trying to garner profits while waiting for the long-term outlook to go back to favoring buying stocks. Here are a few considerations.
My proprietary cycle screening measures on the big cap stocks in the S&P 500 have run up an incredible string of consecutive positive days. As of January 18, that string was at 16. That is by far a record for this indicator, which I constructed in 2005. Normally, when any string gets to around 8 days, it’s a sign that the short term trend is about to get at least a breather. This one is like the Energizer Bunny. It has just kept going and going.
Where’s the energy coming from? The GSD. The US Treasury is saving $100 billion a month in usual outlays. It is pumping that money into dealer and investor bank accounts.
That will only end when President Trump makes it so. We know that one measure that he cares about to gauge his success is the stock market. I would guess that he and his Wall Street guy, Treasury Secretary Mnuchin have discussed this and are watching the dynamic play out with some degree of satisfaction. Skyrocketing stock prices thus provide him with an incentive to keep the GSD going. And that, in turn, keeps the market rising.
Meanwhile, Federal workers are the unfortunate pawns in this game. But they do not matter. Therefore, I can’t foresee the circumstances that would trigger an end to the shutdown, and as a result, an end to the rally. I think it will continue for as long as the shutdown goes on.
This move will ultimately reverse, and I think reverse violently when the GSD ends and the Treasury is forced to pay out hundreds of billions in Federal worker back pay. It will need to borrow that money in the markets immediately. It will suck money out of the stock market.
Had I foreseen this when the shutdown started, I would have recommended buying calls with both fists, but the logic of the shutdown and the rally being joined at the hip did not completely dawn on me until January 11. I didn’t gingerly recommend buying calls on a conditional basis until January 13.
So the question now is whether we should run to jump on a moving train. We could do that by buying SPY calls. I like to go about 4 weeks out to expiration, with a strike price just in the money. I always want to have a mental stop based on an obvious support level on the S&P 500 index. Today I’d put that at 2590, which could result in a significant loss if the trade goes the wrong way.
On the other hand, if the meltup goes on as I expect, the profit could be multiples of the initial bet. My target to take half position profit would be 2800 on the SPX. Then let the rest ride.
Chasing the market now is obviously risky because the driver of the rally is a unique political situation. The rally will end when the GSD ends and I don’t know how to predict that. If it takes weeks, then the market should go a lot higher and you would have enjoyed a tidy profit if you caught the moving train. In the short run, the technical picture says it’s going higher.
Money today moves faster than ever (don’t get left in the dust)