Wall St Has Hit a 10-week Low, and How Money Supply Watching Helped Us Catch the Trend

By watching money supply, we caught the intensification of the downturn last fall, the upturn this spring, and, then, the current downturn:

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It's not always this easy, but by keeping an eye on money supply along with monitoring other indicators, you can often nail things with fair accuracy. Not to mention blowing the Fed out of the water, long term, when it is clear they are operating with faulty theories.

So what's next? As I have mentioned before, Bernanke is the most erratic Fed chairman in the history of the Fed. His dramatic stop and go Fed money printing is causing all types of erratic moves in the economy. The trend followers are all finally catching on to the up moves in the economy that are the result of Bernanke Fed money printing between late September 2008 to January of this year.

But, because these trend followers do not have a business cycle theory, they are always late in catching the turns in the trend (The trend has to already have decidedly turned before they get it). By May of this year, it should have been clear to money supply/business cycle theory observers a dip was going to occur because Bernanke had again slowed money growth. This is what is causing the present downturn in the stock market. Trend followers, on the other hand, should pick up on this only in another month.

How bad will this downturn get? It depends on Bernanke. IF he continues the money slowdown (under 4% annualized M2 nsa growth), the economy is headed for very serious problems. If he reverses course, again, we could blip up. There's generally a lag of at least three months between Fed activity and its impact on the economy, so keeping an eye on money supply should keep us ahead of the economic curve.

Note: I want to emphasise that it is not always this easy to call trends. There are always many countervailing factors, but Bernanke's dramatic money printing shifts makes money supply the SUPER DOMINANT factor at this time. It won't always be this easy--even though money supply growth will always be the key factor to watch.