The Wall Street bears are on the ropes and bleeding and are on the verge of being stopped altogether by the resurgent bull. The month of May, as I see it, will be a supremely critical one for the bears and probably their last chance to turn the market their way. However, based on the latest actions of the Federal Reserve it may already be too late for the bears to mount a meaningful comeback.
According to economist Ed Yardeni, the latest reading of "Super Money" suggests that the Fed is providing lots of liquidity to fuel what he calls the "Global Synchronized Boom (GSB), which is boosting profits in the U.S. and around the world. In March, for instance, so-called "Super Money" was 17.8 percent above the year-ago level, the fastest pace since February 1991. Yardeni points out that during the previous GSB between 1993-1997, Super Money growth ranged between 10 and 16 percent, with a peak of 16.3 percent.
The Fed recently announced that the broader M3 money supply had exploded upward by $42.1 billion, the biggest 1-week increase of the year, to a record $9.043 trillion! Since the beginning of 2004, the M3 money supply has increased by $223.4 billion, or an average weekly increase of $17.2 billion, according to Donald Rowe of The Wall Street Digest. At the current pace, M3 will grow by almost one trillion dollars in 2004.
As Rowe suggests, this is really the story of the year and yet almost no mainstream news outlets have covered it. This, friends, is what is keeping the U.S. economy afloat. It's also what will help stimulate the job growth that so many are wringing their hands over. Already, half a million jobs were created in the first quarter alone. To quote Rowe, "Faster M3 money supply growth produces faster GDP growth."
The Federal Reserve indicators I follow suggest the Fed is laying down a massive line of support underneath the stock market, one that will be extremely difficult, if not impossible, for the bears to break. We could well be witnessing the bears' swan song in 2004.
In fact, if we emerge from the month of May relatively unscathed (and I believe we will), then it should drive the final nail in the bears' coffin since even during the market's weakest phase they were unable to drive it below the critical 9500-10,000 support area of the Dow 30 index (where numerous trend lines and moving averages intersect in the charts). This massive zone of support is also where a lot of Fed liquidity has been injected into the market in the past several months. It suggests that the stock market has received "ultimate support" from the financial powers-that-be and won't be crashing anytime soon. Those who are currently fighting the Fed might want to reconsider.
A final consideration is this monthly chart of the Dow, which shows the dominant long-term trend indicator, the 120-month moving average, increasing its rate of acceleration to the upside as we head into the second half of 2004. Even during the bear market lows earlier this decade the Dow has never plunged beneath this critical moving average. In fact, the Dow has been above the 120-month MA since the inception of its long-term uptrend in the early 1980s. The bears would do well to consider this in the weeks and months ahead.