Back on August 1st, 2018 I sent this tweet:
"the market is going to decline, and it has to do with the Fed and liquidity." https://t.co/RLAZ1uVNRp
— Samantha LaDuc (@SamanthaLaDuc) August 1, 2018
Then on September 23, 2018 (Sunday following the Friday SPX high of $2940.91), I tweeted my concern with FAANG ETF liquidity (they represented a large weighting in passive ETFs which can cause liquidity issues when selling):
As bond yields rise, future cash flows thrown off by FAANGs are far less attractive. During the February bond yield surge, FAANGs dropped 12-14%.
— Samantha LaDuc (@SamanthaLaDuc) September 23, 2018
Fast forward to December 24th on the day of the Christmas Eve Massacre – when SPX was trading $2351 – a FULL 590 POINTS OFF THE HIGH – and here was why… “Liquidity!”
Why Mnuchin called the banks…
“excess collateral but lack of liquidity. Also Banks that couldn’t offload risky loans had to sell liquid assets to shore up there balance sheets for year end reporting of risk weighted assets. Several banks couldn’t offload leveraged loans.” https://t.co/qPJgMZRdPO
— Samantha LaDuc (@SamanthaLaDuc) January 10, 2019
Lastly, that is why I dubbed THIS GIF the TWEET OF THE YEAR for 2019: Go Ahead and Play It!
Here we sit as Powell has finished talking about balance sheet normalization and inflation and I am not surprised market is confused:
POWELL: WE WANT TO RETURN BALANCE SHEET TO MORE NORMAL LEVEL
POWELL: DON’T KNOW EXACT APPROPRIATE LEVEL OF BALANCE SHEET
And there’s that liquidity word again:
BLACKROCK: Powell’s pivot “ultimately is likely to be insufficient to calm markets, as it lacks a clear commitment to a sustained pause … or in balance sheet unwinding, and the latter factor is still contributing to the decline in global liquidity, in our view” pic.twitter.com/4qDph6d11J
— Carl Quintanilla (@carlquintanilla) January 9, 2019
So How Do We TRADE THIS?
Follow the liquidity…
I’m a pattern recognition gal. I take data and give it context.
Put simply: I see market moves coinciding with liquidity changes. And for Context, here are recent liquidity changes: H/T @Barton_options. Emphasis is my own.
Dec 4-24: net withdrawal of $109.9Bn – AND WOULDN’T YA KNOW MARKET TANKED THE WHOLE TIME
Dec 26-27: 65.8Bn release (40.2Bn on 12.26) – HEY, WE BOUNCED ON THE 26TH!
Dec 28-31: 62.7Bn withdrawal (offset by rebalance) – AAAAND WE WERE FLAT
Jan 2-10: 89.6Bn release – DO I REALLY HAVE TO POINT OUT THE OBVIOUS RALLY WE’VE HAD PAST WEEK…
So What’s Next?
Jan 11-15: $117.7Bn – WITHDRAWAL = LIQUIDITY CRUNCH
- Fri-Mon: 57Bn (45Bn from GSE, 12Bn from Treasury), starting late morning on Friday.
- Tue: 60Bn (63Bn from Treasury, 2Bn from Fed QT, GSE release 5Bn).
Jan 16-Feb 6th: $103Bn – RELEASE, JUST BEFORE US TREASURY QUARTERLY FUNDING PLAN
With that, you have my short-term roadmap as it is most likely to be the market’s roadmap. And why fight the Fed?
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At LaDucTrading, Samantha LaDuc leads the analysis, education and trading services. She analyzes price patterns and inter-market relationships across stocks, commodities, currencies and interest rates; develops macro investment themes to identify tactical trading opportunities; and employs strategic technical analysis to deliver high conviction stock, sector and market calls. Through LIVE portfolio-tracking, across multiple time-frames, we offer real-time Trade Alerts via SMS/email that frame the Thesis, Triggers, Time Frames, Trade Set-ups and Option Tactics. Samantha excels in chart pattern recognition, volatility insight with some big-picture macro perspective thrown in.