{"id":10611,"date":"2024-10-01T06:32:19","date_gmt":"2024-10-01T06:32:19","guid":{"rendered":"https:\/\/mycryptomania.com\/?p=10611"},"modified":"2024-10-01T06:32:19","modified_gmt":"2024-10-01T06:32:19","slug":"turbocharging-the-liquidity-cycle-is-bullish-for-stocks","status":"publish","type":"post","link":"https:\/\/mycryptomania.com\/?p=10611","title":{"rendered":"Turbocharging the liquidity cycle is bullish for stocks."},"content":{"rendered":"

A fresh round of fiscal and monetary stimulus from the world\u2019s largest economies<\/strong> are set to boost global economic activity.<\/p>\n

On September 18, the Federal Reserve cut interest rates by 0.50%. That was the first cut in over four years<\/strong>, while the Fed hasn\u2019t cut by that magnitude since the middle of the pandemic.<\/p>\n

Not only has the Fed\u2019s focus shifted toward boosting the labor market and economy, but other countries are joining the stimulus bandwagon to jolt their\u00a0economy<\/strong>.<\/p>\n

Just last week, China\u2019s central bank announced a surprise cut to key interest rates<\/strong> and reduced reserve requirements for its banks among other stimulus measures. All together, it\u2019s the most aggressive easing measures since 2015<\/strong> for the world\u2019s second-largest economy.<\/p>\n

Chinese stocks jumped in response, with the iShares MSCI China ETF (MCHI) having its best week ever with a 19% gain as you can see in the chart below. But it doesn\u2019t stop there. A look at central banks around the world shows a collective shift toward easing monetary policy by cutting interest\u00a0rates<\/strong>.<\/p>\n

As you can see in the chart below, the percentage of central banks around the world that are cutting rates rose above 50%<\/strong> (blue line) in July for the first time since early 2022. If you weight by GDP, the net proportion of central banks whose last move was a cut surged into positive territory this\u00a0month<\/strong>.<\/p>\n

Chart from MacroMicro<\/p>\n

A coordinated round of global central bank stimulus has massive implications for the economic outlook<\/strong> and corporate earnings picture. It could also ignite several areas of the capital markets and deliver the next round of chart breakouts<\/strong>.<\/p>\n

Here are the cyclical sectors I\u2019m following, and why they add to the weight of the evidence that the economic outlook remains positive and the bull market can push higher following recent central bank\u00a0actions<\/strong>.<\/p>\n

Liquidity is Boosting More Cyclical\u00a0Sectors<\/h3>\n

During a recent outlook report covering the next 12\u201318 months<\/a>, I outlined a bullish view that\u2019s being driven by three distinct catalysts.<\/p>\n

One of those catalysts is the longer-term liquidity cycle, which is in the early stages of an upswing and will be boosted further as central banks\u00a0ease<\/strong>.<\/p>\n

In addition, there\u2019s still $2 trillion in fiscal spending<\/strong> from legislation like the the Infrastructure Investment and Jobs Act and Inflation Reduction Act making its way through the\u00a0economy.<\/p>\n

If those catalysts are going to deliver a boost to the economy, then cyclical and commodity-linked stocks should be providing confirmation<\/strong>. And that\u2019s where I\u2019m following the next key round of breakouts and\u00a0setups.<\/p>\n

That includes the XLB materials ETF that holds stocks like Dow Inc (DOW) and steel-maker Nucor (NUE). You can see in the weekly chart below that XLB is moving out to fresh highs after breaking out from a basing period going back to\u00a02022<\/strong>.<\/p>\n

XLB moved above resistance at the $87 level back in February. Since then, price is trading in a tight range while back testing the breakout level as support. But just last week, XLB is moving out to new highs following another five month consolidation<\/strong>.<\/p>\n

You\u2019re also seeing a quick reversal higher in copper miners from a bullish chart pattern<\/strong>. As questions swirled over the health of China\u2019s economy, copper stocks like Freeport-McMoRan (FCX) pulled back from their highs made earlier this\u00a0year.<\/p>\n

But take a look at the COPX fund that holds copper mining stocks. After moving out from a symmetrical triangle pattern, price came back to test the breakout level around $40. In doing so, price created a bullish falling wedge, where COPX is breaking out last week and is quickly back near the prior\u00a0highs<\/strong>.<\/p>\n

I\u2019m also watching chart developments in the transportation sector with IYT in the weekly chart below. The link between economic activity and companies involved with moving goods through land and air is\u00a0clear<\/strong>.<\/p>\n

Transports last peaked around the $68 level back in 2021. After bottoming in late 2022, price is making a series of higher lows while testing resistance<\/strong> on several occasions this year. The weekly MACD and RSI shows momentum is just starting to turn higher, where a breakout would be yet another confirming indicator on the\u00a0outlook<\/strong>.<\/p>\n

We\u2019ve already been seeing positive action in sectors like housing, banks, and small-caps. The chart developments highlighted above adds further weight to the evidence for an improving economic outlook, and that a recession will be avoided over the intermediate-term just as central banks take stimulative action<\/strong>.<\/p>\n

Now What\u2026<\/h3>\n

Stock prices will ultimately follow corporate earnings, which depends on a strong economy to move higher<\/strong>. The price signals coming cyclical sectors is a positive for the earnings outlook, and is arriving just as the earnings cycle is inflecting higher in regions around the\u00a0world<\/strong>.<\/p>\n

You can see in the chart below that earnings growth is turning higher across most regions after decelerating since 2022<\/strong>. A positive rate of change in earnings should be a tailwind for stock prices, which historically has also resulted in a favorable trading environment<\/strong>.<\/p>\n

Chart from Jurrien Timmer<\/a> on\u00a0X<\/p>\n

Earnings and commodity sectors could also be lined up for a boost from another catalyst, and that\u2019s with a weakening U.S. dollar<\/strong>. I\u2019ve written extensively in the past about the U.S. Dollar Index (DXY), and the importance of the 100\u00a0level.<\/p>\n

You can see below that DXY is again testing the 100 level following a bearish momentum reset with both the MACD and RSI<\/strong>. A break below 100 would be another tailwind for corporate earnings<\/strong> (since sales and earnings from abroad become worth more in dollar terms). And since many commodities are priced and traded in U.S. dollars, a weakening dollar should be a positive catalyst for commodities and related producers<\/strong>.<\/p>\n

The longer-term outlook for the economy and stock prices remains bullish in my opinion, but investors should be prepared for election cycle volatility<\/strong>. As I highlighted in my most recent Mosaic Chart Alerts<\/a>, this is about the time that downside arrives based on historic seasonal trends including the presidential election cycle going back to\u00a01928<\/strong>.<\/p>\n

The chart below also shows the CBOE Volatility Index (VIX) in the six months before and after presidential elections. On average, you can see that the VIX starts moving higher about two months ahead of election day, then really accelerates in the final month before elections<\/strong>.<\/p>\n

Chart from Edward\u00a0Jones<\/p>\n

At this point, I expect any volatility heading into the election to just be a pause in the broader bull market trend<\/strong> given the ongoing message coming from cyclical sectors and fresh central bank stimulus helping the liquidity backdrop. As a result, I\u2019m still favoring trade setups in cyclical areas of the\u00a0market<\/strong>.<\/p>\n

That includes Tri Pointe Homes (TPH). After rallying to the $47 level in July, the stock has been consolidating gains. TPH is showing constructive action by making a series of smaller pullbacks off the $47 resistance level, while the relative strength (RS) line is holding near the high. I\u2019m watching for a breakout over $47 on higher volume and confirmation by the RS\u00a0line.<\/p>\n

That\u2019s all for this week. The coming week will feature key reports on activity in the manufacturing and services sector<\/strong> of the economy, along with the payrolls report for the month of September<\/strong>. But I\u2019ll be watching if cyclical stocks can hold and build on their breakouts, and the message they\u2019re sending for the broader market and economic\u00a0outlook<\/strong>.<\/p>\n

I hope you\u2019ve enjoyed The Market Mosaic, and please share this report with your family, friends, coworkers\u2026or anyone that would benefit from an objective look at the stock\u00a0market.<\/p>\n

For updated charts, market analysis, and other trade ideas, you can visit me here: <\/strong>www.mosaicassetco.com<\/strong><\/a><\/p>\n

Disclaimer: these are not recommendations and just my thoughts and opinions\u2026do your own due diligence! I may hold a position in the securities mentioned in this\u00a0report.<\/em><\/p>\n

Turbocharging the liquidity cycle is bullish for stocks.<\/a> was originally published in Coinmonks<\/a> on Medium, where people are continuing the conversation by highlighting and responding to this story.<\/p>","protected":false},"excerpt":{"rendered":"

A fresh round of fiscal and monetary stimulus from the world\u2019s largest economies are set to boost global economic activity. On September 18, the Federal Reserve cut interest rates by 0.50%. That was the first cut in over four years, while the Fed hasn\u2019t cut by that magnitude since the middle of the pandemic. Not […]<\/p>\n","protected":false},"author":0,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2],"tags":[],"class_list":["post-10611","post","type-post","status-publish","format-standard","hentry","category-interesting"],"_links":{"self":[{"href":"https:\/\/mycryptomania.com\/index.php?rest_route=\/wp\/v2\/posts\/10611"}],"collection":[{"href":"https:\/\/mycryptomania.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mycryptomania.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"replies":[{"embeddable":true,"href":"https:\/\/mycryptomania.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=10611"}],"version-history":[{"count":0,"href":"https:\/\/mycryptomania.com\/index.php?rest_route=\/wp\/v2\/posts\/10611\/revisions"}],"wp:attachment":[{"href":"https:\/\/mycryptomania.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=10611"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mycryptomania.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=10611"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mycryptomania.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=10611"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}