Monetary Liquidity Drops from its Best Level

In October of last year, our Asset Allocation Model was as good as it gets.  We had our Psychology Composite giving us its BEST reading of P1, meaning of course that investors were scared out of their skin and the news was as somber as it gets.  The "Wall of Worry" was so broad and so strong that you could drive a herd of bulls on that wall and never feel a threatening vibration.  Today, we have our Psychology Composite at P4, and if you really get inside that ranking you can see that it's a lot closer to being a P5 than it is to being a P3.  So strictly speaking, the investors that are still around are growing a little more optimistic and the "Wall of Worry" has a few cracks showing up in it.

Valuation is still very, very good though.  We now have the S&P 500 10.02% undervalued.  You can see in the chart below that even this is not as attractive as it was in March 2009 when we had the most undervalued market of the last 30-40 years at least, but even today's reduced undervaluation is one of the most attractive of the last 30 years.

Click on the image above to view a larger chart.

So that brings us to today's BIG news.  As of this week, our Monetary Composite has moved from the M1 rating it obtained on May 23, 2011, its very best reading, to today's M2.  That is still firmly in the green zone, but not quite the same as the M1 reading that told you the Fed had only one thing on its mind, getting the economic engine cranked up.  Now as we see this shift, we are getting formal verification of what we have been thinking would happen.  As the news has been turning better, the Fed is getting a little more confident and a little less aggressive with its economic stimulus.

Don Hays

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