Macro Monday 8 - S&P500/M2 Money Supply
已更新
MACRO MONDAY 8
S&P500 / M2 Money Supply (
SPX / WMN2S)
M2 is a broad measure of the US money supply that includes cash, checking deposits, and other types of deposits that are readily convertible to cash such as CDs.
M2 is seen as a reliable metric for forecasting/predicting inflation and for this reason it can be used as leading economic indicator. For example, when there is more cash made available or too much, more cash typically gets spent. A little more can be good, too much or too sudden an increase can increase the risk of inflation. That's why the Federal Reserve constricts the money supply when inflation rears its ugly head. At present the Federal Reserve is decreasing the M2 Money supply in an effort to slow down spending in order to control and reduce the rate of inflation. Since April 2022 the M2 Money Supply has reduced from $22 Trillion down to $20.82 Trillion.
The money supply and its impact on Inflation combined with current interest rates has major ramifications for the general economy, as they heavily influence job availability, consumer spending, business investment, currency strength, and trade balance.
The M2 Money Supply also has a major impact on the stock market and can act as catalyst for increased purchases of stocks (when the money supply is increasing as more money is available) and can also cause the selling of stock when money supply is tight or tightening as it is at present (as less money is available in the wider economy).
The Chart – Accounting for Money Supply
As noted above the M2 Money Supply is reducing and it is expected that this may result in the S&P500 making lower lows as the supply of money continues to contract.
The S&P500 performance looks very different when it is adjusted to account for the increases and decreases of the money supply. We can achieve this by dividing the S&P500 by the M2 Money Supply (Chart 1).
Chart 1 – S&P / M2 Money Supply
- Since 1996 the Major Resistance Zone has stopped every progression higher.
- In 2007 a rejection from the resistance zone resulted in the Great Financial Crisis
- Major recessions are labelled with red arrows & market corrections with blue arrows.
- Since GFC there have been a number of rejections from the resistance zone which have
coincided with notable corrections for the S&P500 (see blue arrows).
- The most notable of these rejections was the COVID Crash in March 2020.
- We are at the resistance zone now and it appears we are struggling to breach above it and
may be rejected again. Given we have been rejected by this level 5 times since the 2007
Great Financial Crisis, it seems wise to remain cautious and expect a rejection from this
level again.
Chart 2 – S&P500 & M2 Money supply (Segregated)
- This chart shows you the S&P price action in isolation and underneath the M2 Money
Supply for reference.
- The declining M2 Money supply is like a weight or float pushing and pulling the S&P500
price action in its direction.
- The M2 Money supply may gravitate down towards its long term trend line over the coming
year(s) and one would expect the S&P500 to follow its lead and also gravitate lower.
- Interestingly, on Chart 2 you can see that the level that the M2 Money Supply and the
S&P500 were at prior to the pandemic would present an S&P500 price tag of $3,350.
Summary
Its seems unlikely that the S&P500 is about to break higher due to the overhead long term resistance zone on Chart 1 which helped predict the last two recessions (red arrows) and a handful of corrections (blue arrows).
There is a strong likelihood of continued M2 Money Supply normalization towards its long term trend line on Chart 2, especially considering Federal Reserves continued efforts to constrict the money supply through quantitative tightening to help quell inflation. These efforts will likely subdue any attempt of positive price action on the S&P500.
It is important to recognise that the Dot Com Bubble in 2000 pressed through the resistance zone on Chart 1 demonstrating just how big a bubble it was. It was initially rejected from the resistance zone in March 1997, however the M2 Money Supply was increasing at this time so whilst this outcome is always possible, it does not presently seem probable with M2 Money supply decreasing and likely continuing to decrease going forward.
Another potential outcome is a false break out above the resistance zone on Chart 1. We have had an unprecedented increase in to the money supply since the March 2020 COVID Crash and this could have a lagging effect which eventually pushes us over the resistance zone. Fiscal Stimulus which is harder to predict could also help us arrive at this scenario. Regardless, if these circumstances are met with continued decreasing M2 Money Supply, I believe that it would be a short lived breach of the resistance zone resulting in maybe a $4,980 S&P500 price tag (a higher high) followed by a severe correction. That is IF M2 Money supply is still decreasing as the S&P500 makes those higher highs.
And finally we have to consider what most people would consider to be the most unrealistic scenario, a Dot Com Style bubble towards the top red line on Chart 1. As improbable as this is, a combination of factors could lead us into this scenario;
- The aforementioned lagging effects of the unprecedented never before seen increase in
the M2 Money Supply since the pandemic.
- Continued or new Fiscal Stimulus from the US government.
- The bullish AI narrative (which appears to be dissipating at present)
This final bullish scenario is worthy of consideration especially factoring in the comparisons of the 2023 AI hype to the 2000 internet boom. As we enter a new technological epoch with the likes of Augmented Reality, Cryptocurrencies and AI, are we getting ahead of ourselves again? Do these technologies need a little more time to mature much like the internet? Are we overextended like we were in 2000? It’s hard to answer no to any of these questions but against the backdrop of record levels of Quantitative Easing and Fiscal Stimulus we have to keep an open mind as the Fed tries to simmer us down from these record levels of liquidity
It will be very interesting to watch these charts over coming weeks and months to see if we get our anticipated rejection from the resistance zone on Chart 1.
A special mention to Ben Cowen from "Intothecryptoverse" who originally brought this style chart to my attention. My chart could be considered a snapshot of his view however I hope I have added to it in some way with the above commentary and some correlations I have noticed.
Thank you for reading to the end. I hope these charts help frame todays market for you going forward.
I’ll keep you posted on any major changes.
PUKA
S&P500 / M2 Money Supply (
SPX / WMN2S)M2 is a broad measure of the US money supply that includes cash, checking deposits, and other types of deposits that are readily convertible to cash such as CDs.
M2 is seen as a reliable metric for forecasting/predicting inflation and for this reason it can be used as leading economic indicator. For example, when there is more cash made available or too much, more cash typically gets spent. A little more can be good, too much or too sudden an increase can increase the risk of inflation. That's why the Federal Reserve constricts the money supply when inflation rears its ugly head. At present the Federal Reserve is decreasing the M2 Money supply in an effort to slow down spending in order to control and reduce the rate of inflation. Since April 2022 the M2 Money Supply has reduced from $22 Trillion down to $20.82 Trillion.
The money supply and its impact on Inflation combined with current interest rates has major ramifications for the general economy, as they heavily influence job availability, consumer spending, business investment, currency strength, and trade balance.
The M2 Money Supply also has a major impact on the stock market and can act as catalyst for increased purchases of stocks (when the money supply is increasing as more money is available) and can also cause the selling of stock when money supply is tight or tightening as it is at present (as less money is available in the wider economy).
The Chart – Accounting for Money Supply
As noted above the M2 Money Supply is reducing and it is expected that this may result in the S&P500 making lower lows as the supply of money continues to contract.
The S&P500 performance looks very different when it is adjusted to account for the increases and decreases of the money supply. We can achieve this by dividing the S&P500 by the M2 Money Supply (Chart 1).
Chart 1 – S&P / M2 Money Supply
- Since 1996 the Major Resistance Zone has stopped every progression higher.
- In 2007 a rejection from the resistance zone resulted in the Great Financial Crisis
- Major recessions are labelled with red arrows & market corrections with blue arrows.
- Since GFC there have been a number of rejections from the resistance zone which have
coincided with notable corrections for the S&P500 (see blue arrows).
- The most notable of these rejections was the COVID Crash in March 2020.
- We are at the resistance zone now and it appears we are struggling to breach above it and
may be rejected again. Given we have been rejected by this level 5 times since the 2007
Great Financial Crisis, it seems wise to remain cautious and expect a rejection from this
level again.
Chart 2 – S&P500 & M2 Money supply (Segregated)
- This chart shows you the S&P price action in isolation and underneath the M2 Money
Supply for reference.
- The declining M2 Money supply is like a weight or float pushing and pulling the S&P500
price action in its direction.
- The M2 Money supply may gravitate down towards its long term trend line over the coming
year(s) and one would expect the S&P500 to follow its lead and also gravitate lower.
- Interestingly, on Chart 2 you can see that the level that the M2 Money Supply and the
S&P500 were at prior to the pandemic would present an S&P500 price tag of $3,350.
Summary
Its seems unlikely that the S&P500 is about to break higher due to the overhead long term resistance zone on Chart 1 which helped predict the last two recessions (red arrows) and a handful of corrections (blue arrows).
There is a strong likelihood of continued M2 Money Supply normalization towards its long term trend line on Chart 2, especially considering Federal Reserves continued efforts to constrict the money supply through quantitative tightening to help quell inflation. These efforts will likely subdue any attempt of positive price action on the S&P500.
It is important to recognise that the Dot Com Bubble in 2000 pressed through the resistance zone on Chart 1 demonstrating just how big a bubble it was. It was initially rejected from the resistance zone in March 1997, however the M2 Money Supply was increasing at this time so whilst this outcome is always possible, it does not presently seem probable with M2 Money supply decreasing and likely continuing to decrease going forward.
Another potential outcome is a false break out above the resistance zone on Chart 1. We have had an unprecedented increase in to the money supply since the March 2020 COVID Crash and this could have a lagging effect which eventually pushes us over the resistance zone. Fiscal Stimulus which is harder to predict could also help us arrive at this scenario. Regardless, if these circumstances are met with continued decreasing M2 Money Supply, I believe that it would be a short lived breach of the resistance zone resulting in maybe a $4,980 S&P500 price tag (a higher high) followed by a severe correction. That is IF M2 Money supply is still decreasing as the S&P500 makes those higher highs.
And finally we have to consider what most people would consider to be the most unrealistic scenario, a Dot Com Style bubble towards the top red line on Chart 1. As improbable as this is, a combination of factors could lead us into this scenario;
- The aforementioned lagging effects of the unprecedented never before seen increase in
the M2 Money Supply since the pandemic.
- Continued or new Fiscal Stimulus from the US government.
- The bullish AI narrative (which appears to be dissipating at present)
This final bullish scenario is worthy of consideration especially factoring in the comparisons of the 2023 AI hype to the 2000 internet boom. As we enter a new technological epoch with the likes of Augmented Reality, Cryptocurrencies and AI, are we getting ahead of ourselves again? Do these technologies need a little more time to mature much like the internet? Are we overextended like we were in 2000? It’s hard to answer no to any of these questions but against the backdrop of record levels of Quantitative Easing and Fiscal Stimulus we have to keep an open mind as the Fed tries to simmer us down from these record levels of liquidity
It will be very interesting to watch these charts over coming weeks and months to see if we get our anticipated rejection from the resistance zone on Chart 1.
A special mention to Ben Cowen from "Intothecryptoverse" who originally brought this style chart to my attention. My chart could be considered a snapshot of his view however I hope I have added to it in some way with the above commentary and some correlations I have noticed.
Thank you for reading to the end. I hope these charts help frame todays market for you going forward.
I’ll keep you posted on any major changes.
PUKA
註釋
Chart 1 – S&P / M2 Money SupplyChart 1 is a representation of how the S&P500 performance looks when it is adjusted to account for the increases and decreases of the M2 money supply
The M2 Money Supply in isolation can be used as an indication of increasing/decreasing liquidity, thus increases/decreases to M2 Money Supply have a natural history of correlating to similar increases/decreases to the S&P500.
When we divide the S&P500 by the M2 Money Supply we get a visual representation of how the S&P500 is performing accounting for inflows and outflows of liquidity (Chart 1) and this paints a very interesting bullish picture at present.
▫️ In Dec 2023 this chart broke to new highs not seen in 21 years...
▫️ Since 2001 the major resistance zone (red) has rejected every progression higher, that is until Dec 2023 when we broke decisively through this level.
▫️ On the chart major recessions are labelled with red arrows & market corrections with blue arrows.
▫️ In 2007 a rejection from the resistance zone resulted in the Great Financial Crisis (GFC)
▫️ Since GFC there was repeated rejections from the major resistance zone which have coincided with notable corrections for the S&P500 (see blue arrows).
▫️ The most notable of these rejections was the COVID Crash in March 2020.
▫️ At present we have broken through this Major resistance zone and it appears decisive. A pull back to establish support and thereafter a continuation higher should not surprise us. I lean towards a long term bullish environment with some short term but expected pain.
▫️ This chart adds weight to a long term bull market thesis as we have broken above a liquidity resistance levels that held since Sept 2001.
註釋
Chart 2 - S&P500 with M2 Money Supply (separately expressed)▫️ The M2 Money supply is still well above its general long term trajectory (Magenta Line) and thus if we see a move below the Major Resistance Zone on Chart 1 we can conclude that moving to a risk off strategy would be a measured response to losing this level of support, after which waiting for a reversion to the long term M2 Money Supply trend line (magenta) on Chart 2 could be a strategy worth considering at this juncture.
▫️ Please ignore my red and green arrows in Chart 2 as these were prior trajectory's that I thought plausible given the we were hitting the Major Resistance Zone on Chart 1 that we had been rejected from for 21 years. Obviously the situation has now changed since we have broken above this zone and we have to move with these changes.
There are a lot of if ands and buts but the beauty of this chart is that you can visit it on my Trading View page, press play and see where all these metrics are at to help you with your risk strategy.
Hope its helpful and ill share the link in the comments
PUKA
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