It’s been a good start for our latest stock recommendation at Tactical Wealth Investor. Shares of this community bank titan are up 5% in a week, and it’s hardly surprising…
As I explained last week, the market continues to experience broad optimism on the back of the Federal Reserve’s latest meeting. Friday’s jobs report showed that the economy is holding strong. And we continue to see buying in stocks with a market capitalization of $2 billion or more.
That’s positive for the Russell 2000!
But I want to show you the actual source of this rally…
I’m going to keep this short and explain why I’m investing and deploying capital for the long term right now.
Liquidity. Liquidity. Liquidity.
Back in October, the markets bottomed out.
Most people weren’t paying attention at the time, but there was a disaster happening in Europe. The British pension system was under stress. And hedge and pension funds were forced to sell the only liquid asset they had — which was leveraged to the hilt — gilt bonds.
It seemed like a small event at the time. Most people thought it was a minor blip on the radar. It wasn’t.
The British economy survived because the Bank of England pivoted and started buying every asset possible in sight.
Meanwhile, U.S. Treasury Secretary Janet Yellen sounded the alarm in mid-October.
While she tried to calm markets on Oct. 11 by saying that they were functioning properly, she pivoted in her language and started to acknowledge that liquidity in the global system was under stress.
And what happened next?
Liquidity in the system started to expand.
The Chicago Fed Adjusted National Financial Conditions Index (ANFCI) has been expanding since its bottom in October. And few traders seem to have been paying attention.
Traders who have been net short have taken it on the chin by ignoring market liquidity.
In fact, we’re not expanding on liquidity at the fastest pace since 2020.
And with the People’s Bank of China providing a significant amount of support to its economy, that capital is finding its way into our system.
I know it’s hard to put aside your bias in these markets. But the reality is that liquidity drives the market, not sentiment. So it’s not terribly surprising to see this market rally the way it has since the Treasury Department started to increase its aggressiveness in addressing the debt ceiling on Jan. 9.
Liquidity is the market. And as long as it remains robust, you have to keep dancing. I’ll let you know when the signal goes red and it’s time to short.
Enjoy your day,
P.S. Please let me know if you have any feedback, questions about today’s issue or anything else. Just email us at email@example.com.
*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.
Market Momentum is Green
Federal Reserve Chair Jerome Powell will speak at 12:40 p.m. ET on Tuesday in a highly anticipated speech. The focus will be on the central bank’s ability to tame inflation and tighten this market. Tomorrow could be the big day that this finally does go in the negative momentum direction. I’m looking at the $390 level on the S&P 500 as a lottery-style play.