Courtesy of Lee Adler of the Wall Street Examiner
The composite liquidity indicator rose last week. It continues breaking out to new highs. There is no sign of any trend reversal in spite of one or two components turning bearish from time to time. Three components remain in bullish intermediate trends. One has turned bearish. Two are neutral. The bullish indicators are overwhelming any slowness in the indicators that are neutral or bearish.
The Fed’s purchases from Primary Dealers carry the heaviest weighting in the index. With the onset of QE3, this will become an even more bullish influence than it already is. Foreign central bank purchases are the second most important weight. That indicator is neutral. It is not weak enough to overcome Fed buying. The QE3 program may have been partly a response to weakening FCB buying over the past year. The Fed will now replace the lost liquidity from the FCBs. Bank deposit inflows are very bullish. The pattern of bank trading of non Treasury and Agency issues is also bullish.
The uptrend in liquidity now looks sufficiently strong to support bull markets in both stocks and bonds. In addition, when there is selling in one market, it frees up cash, some of which will flow toward the other market.
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