With our Monetary Composite still strongly at M1, today, let's break down one of the items that history suggests has the best correlation to future performance. When you look at Monetary Liquidity, nothing yet has been discovered to beat the good ol' yield curve.
A steep yield curve is typically viewed as a big positive, meaning when the yield of the 10-year T-Note is much higher than that of the 90-day T-Bill. But what's even more positive is when this yield curve is as high as it is now, and starting to decline, as it is now. When you have this condition, the scared money in T-bills and CDs is being pushed out into something that promotes growth, first into long-term bonds and eventually into stocks.
You can see below that, since the financial crisis that started developing in 2007, this push has presented the lowest yields in the long bond in history. Some of that, obviously, has been caused by international pools of money and its flight to safety, and part has been caused by the Fed's QE programs, but a big part of this lower yield has been caused by individual investors and banks buying longer-term bonds...instead of the close to zero interest rates on short-term financial instruments.
So, it was a HUGE signal when our Bond Momentum Gauge, a few weeks ago, told us to sell long-term bonds (read August 17th's post by clicking here). When you think about it, not only was this a signal that bond yields were about to move up, but it was also a peripheral signal that fear had peaked and was about to move down.
Remember, higher yields usually mean better economic conditions in the future, less fear, and higher stock prices.
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