Stocks May Be Heading Sharply Lower As Liquidity Drain Begins
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It was a very slow day. The market just consolidated sideways, with no significant headlines driving the price.
The pattern in the S&P 500 since March 11 appears to be part of a bear flag, or ending diagonal triangle. A clear 5-wave overlapping structure is in place, which suggests it is corrective. If the count is correct, then today’s high marks the end of the pattern, and he next significant move in the index will be lower, which leads to an eventual break of the low around 5,500. If this is right, we should move quickly to fill yesterday’s gap and move back to 5,700, as the first step. I would think a move above 5,800 invalidates this idea.
In the meantime, it’s possible that with the quarter-end coming, I’m feeling a bit overconfident about this view because I know the reverse repo facility will ramp up, which will likely drain liquidity between now and the end of the month. It rose to about $215 billion today and could very well be at about $500 billion on March 31.
We will know if the liquidity is getting tight, if SOFR starts rising, and if it heads over 4.4%. The other day, it was trading below 4.3% with the overnight funding flush with cash, likely from investors moving out of equities into safer waters. Now, we are looking at the opposite scenario where banks pull liquidity from the market to shore up their balance sheets for quarter-end.
Also, today’s volume in the S&P 500 was just 1 million contracts, so I’m thinking that sellers have just taken a break.
Bitcoin could be the first sign if liquidity starts to go. With it at resistance and a very similar pattern to the S&P 500, it is worth keeping an eye on from that standpoint.
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. ...
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