- Net Real Stimulus is already negative.
- Excess liquidity is not there like it was last year.
- A sector rotation is already quite obvious.
Front End macroeconomic conditions are changing, and I think we all should engage proactive strategies like the Stock of the Week Strategy, but for some these changes may not be nearly as clear. The FOMC engaged stimulus programs in 2011 and 2012 designed to inject liquidity and influence investment, and they have been successful as we all can see.
During 2013 the excess liquidity injected into the U.S. economy ($20 Billion per month of net real stimulus) allowed buyers to be there after every hiccup in the market, but that has now officially changed. Excess liquidity is not there like it was last year to buy the dips.
Net real stimulus is now actually -$10B per month, and a process has already begun that investors must take notice of. When excess liquidity levels dry up, investors first rotate out of higher beta names, like those in the NASDAQ and the Russell 2000, and they look for safer places for their money. That is usually in stocks like those in the Dow Jones Industrial Average.
Since early March the trade has clearly been to buy the double short ETFs for the NASDAQ (ProShares UltraShort QQQ ETF (NYSEARCA:QID)) and Russell 2000 (ProShares UltraShort Russell 2000 ETF (TWM)) and hedge that with the double long Dow ETF (ProShares Ultra Dow 30 ETF (NYSEARCA:DDM)), to take advantage of the changes in excess liquidity.
That is exactly what has been happening recently, but we are in the early innings of this rotation. Eventually this will roll over to the traditionally more conservative stocks too, and when it does the media will likely step up and take more notice.
Right now nothing seems serious because the Dow is stable, but once that changes headlines will change, and they will be asking why. The answer lies within the same longer term macroeconomic indicator that caused me to drag my heels in 2013, the same one that measures the real natural growth rate of the underlying economy. The Investment Rate proves that the natural growth of the underlying economy is deteriorating, and now that the net real stimulus is negative, my thesis is that economic growth will revert to its naturalized trend.
The front-end macroeconomic conditions are changing, and the combined efforts of the UST and FOMC are now effectively draining liquidity from the financial system. Tapering is another way of tightening monetary policy, and that brings the real economy back into play.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: By Thomas Kee for Stock Traders Daily and neither receives compensation from the publicly traded companies listed herein for writing this article.
Additional disclosure: Clients of Stock Traders Daily may buy or sell the ETFs listed here at any time without prior notice.