How Demand Deposits Affect the Stock Market

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Includes: DIA, SPY
by: New Low Observer

It has been a while since I last mentioned the Demand Deposits of Commercial Banks. It is necessary for me to review what I said in my February 11, 2009 posting. At the time, I felt that what I was observing was so important that it deserved the title "Convergence of Extraordinary Forces." In retrospect, that article seemed prescient considering that only one month later the stock market would embark on one of the most unforgettable rises in history.

Let's review what I said back in February of 2009:

  • The parabolic rise of demand deposits was likely to succumb to entropy.
  • The stock market would respond to the decline in demand deposits by rising violently.
  • The rise in demand deposits would peak in June of 2009.
  • At 59% y-o-y change, demand deposits would revert, at least, to the previous peak of 13% y-o-y.

In the above chart, we can see that the 54% y-o-y change (previously 59% before revisions) was in fact the very top of the parabolic rise in demand deposits. The y-o-y change has now fallen to the level of 22% and is still on track to reach the 13% peak of 2003.

A look back at the data shows that after revisions were made by the Federal Reserve, the index actually peaked in December of 2008. This is a far cry from my June 2009 estimation of when the index would peak. However, the stock market has responded as expected by rising in a violent fashion.

Based on the cycles mentioned in the February 11, 2009 article the current downward trend in demand deposits is expected to end around September 2011. At which point, there would be a rise in demand deposits at commercial banks and a decline in the stock market.

It is hard for me to believe that we have another 2 years of market increases to go. However, when the Coppock Curve is applied to the total amount of demand deposits on a monthly basis we get an ascending trendline (green line) which suggests that June 2010 or April 2011 is the next low for demand deposits. However, achieving the 13% y-o-y level (mentioned above) could mean a reversal of the downward trend in spite of all cycle projections.

It is clear that my interpretations on the change in demand deposits is purely speculative. However, those who read this might be able to refine my thinking on this topic and bring some clarity to my thought processes to the fore.