The S&P500 moved up 3% last week, but on volume that was–again–lower than that of the prior week’s price drop. So when prices rise, volume falls; when prices fall, volume rises. This is not a good signal that new and enthusiastic money is moving into stocks to buy. If anything, it keeps suggesting that the owners of stocks are inching closer to the exit door. And volatility also fell to 18 month lows, also suggesting that a rise (in fear) is more likely than a drop.
The economic data were mixed. Personal income inched up slightly, but less than expected. Personal spending rose more than expected. ISM Manufacturing was weaker than forecasted; ISM Non-Manufacturing was stronger. Initial claims were still elevated, at 469,000. Factory orders came in lower than consensus estimates. Headline (U-3) unemployment remained unchanged at 9.7%, but broad (U-6) unemployment rose to 16.8%, near the record highs reached a couple of months ago. Non-farm payrolls fell 36,000 in February; January’s losses were revised down to 26,000. Average weekly hours worked climbed to 33.8, but average wages earned rose only 0.1% when 0.2% was expected.
Technically, the uptrend on the daily charts, while in tact, is becoming toppy. The downtrend on the weekly charts is still in effect, and the weekly indicators are still displaying a slow-motion topping formation that began late in 2009.
So what could cause traders and investors to actually use the exit door and sell for more than just a couple of weeks?
As noted during the uptrend that began in March 2009, the Fed’s liquidity pump has been almost perfectly correlated with the rally. And the huge size of the pump also suggests that the Fed’s actions could have reasonably explained the rise of most risk assets, including stocks; the Fed’s quantitative easing program alone pumped in over $1.5 trillion of newly printed (created) dollars into the capital markets.
So when will these programs end?
Well, many of the emergency funding programs ended just last month, in February. The PDCF, AMLF, MMIFF, TLGP, CPFF and foreign swap lines are either fully or almost fully shut down. Next week, the Fed will end its Term Auction Facility (TAF) program, and on March 31, the Fed will partly terminate the TALF program. But most importantly, on March 31–only a few weeks from now–the Fed will end its $1.5 trillion quantitative easing program.
In a couple of weeks, most of the Fed’s massive liquidity pump will be shut off.
Clearly, nobody can know with certainty that this will kill the price party. But given that much of the price rise occurred precisely while the Fed’s liquidity party was in full swing, only a fool would not take some precautionary measures.
The Fed is turning off the music and taking away the punchbowl. Soon we will see if the remaining guests can keep the party going–all by themselves.