In the current market landscape, a notable surge in liquidity is contributing to a robust uptrend, fostering optimism among investors. Despite concerns over the Dow’s six-year overbought momentum, signs of improvement are evident since the retest low on October 27. Notably, a noteworthy shift is observed, with 83% of stocks trading above their 50-day moving average, indicating a broadening tape.
This development challenges the narrative of the “new bull market” that emerged last year, which was characterized by the dominance of a few mega growers propelling the indices higher. Money market funds (MMFs) are playing a crucial role in bolstering market strength, opting for T-Bills over the Federal Reserve’s reverse repo program (RRP).
Interestingly, this move by MMFs suggests an anticipation of a turn in the Fed cycle, defying the expectations of Quantitative Tightening (QT). The RRP program is shrinking rapidly, creating an atmosphere where the Fed appears to be bucking the trend of tightening.
However, amidst the positive momentum, cautionary notes arise. The Dow’s momentum, as measured by the Relative Strength Index (RSI), is six years into overbought territory, a level not seen since the 2018 VixPlosion. This overbought condition raises concerns about the sustainability of the current market exuberance.
As the market enjoys the benefits of increased liquidity and a broader tape, investors must navigate carefully, considering both the positive trends and potential challenges posed by overextended momentum in certain indices.
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One big factor in the market’s strength these days is improving liquidity, despite contraction in the Fed’s balance sheet. This is the result of money market funds (MMFs) choosing to buy T-Bills instead of using the Fed’s reverse repo program (RRP). With MMFs sniffing out a turn… pic.twitter.com/wEJus0uOaR
— Jurrien Timmer (@TimmerFidelity) December 11, 2023
A major flaw in the “new bull market” narrative since last year is the narrowness of the tape, with only a handful of mega growers pushing the indices higher. However, there are signs of improvement since the retest low on October 27. With 83% of stocks trading above their 50-day… pic.twitter.com/JsewwG5ipa
— Jurrien Timmer (@TimmerFidelity) December 11, 2023
Bulls, you have now ensured that you will get monkey hammered on Wednesday.
The Dow is six years overbought on momentum (RSI).
The most since 2018 VixPlosion.
Good job everybody. pic.twitter.com/bcgGl6zwRn
— Mac10 (@SuburbanDrone) December 11, 2023