Wednesday Musings

Wednesday Musings

“We define ourselves far too often by our past failures. That’s not you. You are this person right now. You’re the person who has learned from those failures.”

– Joe Rogan

This past week Markets (S&P500) are up just over 1%, and are now up over 20% for the year. All three major indices are at or near all time highs.

The market is running red hot and has more than doubled from its COVID lows. This tends to make some nervous, but as we've previously discussed this is a very bullish signal. When stocks or any asset hits a new high, no one has a loss, what could possibly be more bullish?

That is not say the market will go up forever, and in my opinion what could derail this market is tightening financial conditions. That is typically how the Federal Reserve Slows down the economy and occurs naturally at the end of a business cycle. This is not the case at the moment, and after Jerome Powell's notes on Friday doesn't seem like the case anytime soon.

I was on Fox Business Varney & Co today to discuss just this

To measure this specifically I look at The Chicago Federal Reserve’s National Financial Conditions Index (NFCI). The NFCI provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets and the traditional and “shadow” banking systems.

This index is shown in the chart below, and is a littler counter intuitive, the greater the negative the number the greater the liquidity. If you look at February and March of last year during the height of the COVID lock downs, the is massive spike to the upside, meaning liquidity was very scarce. This coincided with massive market corrections. Since then liquidity has dramatically increased, and doesn't look like any trouble is on the horizon. Its my current thesis that until this changes meaningfully, stocks are likley to trend upwards.