Priming the Pump

January 24, 2021

Weekly Market Outlook

By Keith Schneider


blankPump priming is the action taken to stimulate an economy, usually during a recessionary period, through government spending and interest rate and tax reductions...

When I started in the trading business down on the floor of the NY exchanges some 40+ years ago, we followed many economic signals and watched how the geopolitical news impacted the price of commodities (especially gold), the US dollar, and oil prices.

Back then, inflation was a problem, and the Federal Reserve was not yet priming the pump by adding liquidity to the system.

However, the Fed began responding to crises by adding liquidity into the markets in 1987 with the October meltdown. It did it again in 2001 with 9/11 attacks, and then again in 2008-2009 with the housing and credit crisis.

In 2008-09 the Fed intervened in a dramatic fashion, and as you will see below, that has continued up to today.

In early 2020, with the surprise attack of a worldwide pandemic, all global banks throughout the world began an aggressive intervention.

In the US, the Federal Reserve and Capitol Hill intervened dramatically and have been priming the pump ever since through easy monetary policy, lowering taxes, repurchasing of debt instruments, and even buying stocks for their balance sheet.

Add to this several stimulus bills, and you now have a systematic pumping that’s adding a ton of liquidity to our banking, debt, and stock markets.

Money growth is a way for the Federal Reserve to not only keep the economy humming but also to boost inflation.  The problem is that eventually, inflation takes hold, and it can be “ugly.”

Much of the rise in Gold and Silver in the past few years is tied to this robust money growth.

See Money Supply below since the pumps were primed starting in 2001:

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Unfortunately, this action does not help everyone in our society.

However, certain people benefit from it in the form of rising prices in their homes (in certain parts of the US), collectibles (expensive watches), artwork, and especially in the stock market.

Notice in the chart below the high correlation of the S&P 500 and the growth of the Money Supply, which is the result of the Fed’s injection of money into the system:

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It is easy to see how closely correlated money supply (liquidity) and the S&P 500 index grow together.

In fact, in rare instances where the Fed has attempted to tighten the money supply, it has had a detrimental effect on the market.

What we know is that we should never fight the Fed.  They can keep the markets powering higher with money supply (like now) for a lot longer than anyone’s rational expectations.

Why am I telling you this?

We were fortunate to convert our knowledge of the markets for many years into meaningful ways to invest. My partners and I developed these powerful tools and models to help you manage and grow your assets.  Our partners and employees are committed to 5 important principles:

  1. Create an investment process that works no matter what the prevailing winds dictate. What we think does not matter. We are not in the “predicting business.” Most importantly, don’t allow your personal political opinions your investment decisions; let the data decide.
  2. Design investment tools and models that do better than the markets (or buy and hold) on a RISK adjusted basis.
  3. Make all the MarketGauge tools and strategies ADAPTIVE. This means that the process by design is “reactive” to changes in the market and adapts to being able to make money in different market conditions.  This occurs when growth goes out of favor and value begins to outperform.  This means taking advantage of newly emerging trends as we did with clean energy over the past 6 months or semiconductor stocks the past 3 months.  It also means when the US markets lose steam, we will adapt and move money into the leading countries around the world.  And last, we adapt by taking money off the table when we have a profitable position or getting stopped out with a small, manageable loss when the trend of a stock or ETF does not do what we expected
  4. Risk Matters. Don’t lose money unnecessarily.  We built automatic systems that tell us when to be “in” or when to be “out.” These systems adapt to new inputs and move accordingly.   We would much rather have a minimal loss on a trade then ride what can and usually is, a big wave down.
  5. Have transparent tools and reporting so our members can review quickly where the markets stand and which way the wind is blowing… and how we may be adapting in the near future.

We work hard every day to make sure we live by these 5 principles.   We enjoy communicating with you, providing the “BIG VIEW” and the many tools, indicators, and proprietary trading discipline we have developed.   We welcome your feedback at any time.

The highlights of this week’s market action are as follows:

  • Risk Gauges are back to 100% bullish. Several weeks ago, we went to cash in one of our models but were “pulled back” into the market in our S&P segment. This is our adaptive system at work.
  • Utilities backed off its risk-off reading from last week and once again is bullish
  • The Dow industrials (DIA) remain under its short-term moving average while the QQQ, IWM, and SPY all made new all-time highs and are back above their short-term averages
  • After small caps began to lead in the last few weeks, large-cap growth stocks took over this past week. These stocks gained new momentum.
  • Real Motion (momentum) is still diverging from price action on three of the four key US equity benchmarks, which is neutral until it resolves.
  • Market Internals are still in negative territory with the McClellan Oscillator unable to get above a negative reading.
  • Volatility is still (cash index $vix.x) above 20, showing markets are still not convinced all is clear.
  • Sentiment readings are giving a mixed signal with IWM bouncing off its neutral level while the S&P 500 is showing a negative reading short term.
  • Mish’s modern family is showing some stress with Transportation (IYT) closing under its 10 DMA while Retail closed at new all-time highs.
  • Emerging Markets (EEM) outpaced US equities and more established foreign equities yet again but appears to be running rich.
  • Soft commodities (DBA) backed off its recent tear from all-time lows and now are running rich and susceptible to some mean reversion.
  • The 10 and 20-year bonds (TLT) are trying to stabilize or rally after getting a bit oversold. Given the elongation of the COVID “lockdown” interest rates are not yet sure whether to rise (economic recovery) or trend lower (sluggish business cycle) as we do not seem to be coming out of the malaise fast enough
  • Gold and Silver are still giving us confusing messages. Gold is sitting in between two key moving averages on daily charts. Silver may be riper for a move higher as it may benefit from the recent rise and momentum in material and mining stocks (XME). Silver may be more of a beneficiary of an economic recovery than Gold.  This can also be seen in the recent rise in Copper, a metal used in home building and construction.

Best wishes for your trading.

2 Comments

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    Gene Yoder

    I just want to take a moment to say thank you! I struggled for years with my investments in the market. Last year I made over 6 figures being invested in your systems and learning from you guys. Michelle is awesome as well.

    Thank you!

    - Reply
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    Drew Steven

    Hi Keith,
    Your previous outlook on conditions in the market have been very good and accurate and I enjoy them very much.
    This One takes the Cake.
    Very well said .
    Keep up the great work
    Regards Drew

    - Reply

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