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WHAT’S DRIVING THE MARKET?

We’ve been asked repeatedly how the stock market has managed to bounce off the nearby lows with such veracity.  Especially with the ongoing weakness we have seen in the incoming U.S. economic data due to the fact that the retail investor still refuses to participate and is solely focused on income-generating strategies.  The answer is that the market may have been on the receiving end of another few jolts of liquidity.  M2 money supply has expanded $38.5 million in the past two weeks and the M1 money multiple has risen from 0.839 to 0.862.

When we go to the weekly data from the Fed, we see that “trading assets” on commercial bank balance sheets expanded to $325 billion in the past two weeks from $297 billion.  And, when we go to the Commitment of Traders report, we see that there has been a big swing in the net speculation position on the S&P 500 “E-minis” on the Mercantile Exchange (futures and options) to a net long position of 28,172 contracts from 15,155 net shorts just two weeks ago. That’s a big part of the bounce-back — prop traders and short-coverings.  Nothing fundamental here, as far as we can see.

More in this issue of Breakfast with Dave:

• While you were sleeping: European equity markets continue to rally, now up six days in a row, while, Asian stock markets are slipping; Moody’s downgraded Portugal’s credit rating by two notches, to A1; China’s economy appears to be cooling down
• Just call it a whole lot of volatility: for the first half of 2010, the action in the S&P 500 has been very volatile
• Small business sentiment in the U.S. gets smaller: the latest NFIB optimism index fell to a three-month low in June
• Bank of Canada outlook surveys: slowing growth and easing credit conditions

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