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We have never come across a satisfactory way of quantifying overall financial market liquidity, but major trend changes in liquidity can be observed in the price action. In this regard, the price action in several markets points to a major downward reversal in the liquidity trend having occurred during the first half of October.
To further explain, too many markets reversed course during the first half of October for it to be a random coincidence. Therefore, during this period there must have been an underlying shift in something with the ability to pressure prices in diverse markets upward or downward. A shift in the liquidity trend is the most logical explanation.
A shift in the liquidity trend could explain why all the following happened within a 2-week period:
- There were spectacular downward reversals in the prices of stocks focussed on Rare Earth Elements (REEs), indicating that the REE bubble — a bubble that was extremely profitable for us — has burst.
- The prices of gold and silver rocketed upward and then reversed downward.
- The gold mining indices/ETFs peaked in mid-October, two days after breaking above their 2011 highs, and then plunged.
- The prices of platinum and palladium rocketed upward and then plunged.
- After peaking during the second week of October, United States Antimony Corporation (NYSE:UAMY), a proxy for the antimony speculation, quickly lost about two-thirds of its value.
6. Bitcoin made a new all-time high and then reversed downward.
7. The German stock market, as represented on the following chart by the DAX, made a marginal new all-time high and then reversed course. The chart indicates that the DAX may be about to complete an intermediate-term topping pattern.
The most important market that is yet to show evidence of declining liquidity is the one that is being supported to the greatest extent by passive money flows: the US stock market as represented by the SPX. However, if a major liquidity trend reversal is underway then its effects should start to become apparent in the senior US equity indices by early next year at the latest.
More generally, if a major liquidity trend reversal is underway then no market will be spared and the next several months will be a period in which to ‘play defence’.