The stock market carved out yet another bowl-shaped formation on the intraday charts yesterday, making everyone who bought the dip a lucky winner. Stocks have swooned in four of the last five sessions and closed higher for six consecutive days, but yesterday’s swoon was a little more dramatic than the others. Some attributed the selloff portion of the day to mounting concerns that President Obama’s tax proposals will soak not only the “rich,” but the middle class. Whatever misgivings investors may have had about this were forgotten later in the day, however, when Helicopter Ben, in testimony before Congress, promised there would be no tightening until such time as the tempo of the U.S. economy picks up significantly.  This should have come as good news to monetarists, since, given the grave structural weakness of the economy, it might be another ten years before things start to pick up significantly.

Interest rates aside, our colleague Larry Amernick (click here to sample his work) sees clear evidence that the Fed has begun to withdraw liquidity from the markets. “The party’s over folks!” he wrote recently. “The Fed’s not your friend any more. It is slowly withdrawing the massive amount of liquidity that flooded the markets with excess reserves after the collapse of Lehman Brothers in October 2008. This is occurring at the same time the economy appears to be rolling over again.”

Larry believes, as we do, that the Fed did not accomplish much — other than to goose shares: “Although fueling a short and powerful cyclical bull market during Q2 (with the S&P 500 up 43.4% from trough to peak),” he writes, “the Fed failed in its basic goal of providing full employment and stable prices. Alarmists argued that the 100%+ increase in the year-on-year change in the Monetary Base would produce hyperinflation. Other clear-headed analysts argued that the Fed’s actions would not affect prices and the U.S. would slide into a Japanese-style deflation.

“We did see a mild form of ‘hyperinflation,’ but that was in a mini-bubble of commodity and global equity prices. The Fed’s injection of liquidity did not have any positive  measurable effect outside of higher equity and commodity prices. Now, it is beginning to remove this excess liquidity, and this has negative ramifications for equities, oil and gold.

Look at the weekly chart of the S&P 500 above. All of the studies are measured by a 40-week Exponential Moving Average.

Banks Tight Despite Easing

“The upper window contains the Fed Funds rate. Below that, is the six-month rate-of- change of the Monetary Base. Above the SP-500 is the year-on-year rate of the Monetary Base.  The six-month rate-of-change is now negative and the yearly change is approaching its 40-week EMA. Monetary aggregates lead the markets and the economy. However, in this dysfunctional environment, bank standards and lending practices are tight despite the supportive monetary policy of the Federal Reserve. The demand for money is also shrinking. The largest monetary aggregate M-3, which I calculate regularly, has been shrinking consistently since 2008.

“The decline of M-3 gives dual signals. First, there is little or no inflationary pressure in the system; and second, there is little economic demand for new business activity.

The accommodative Fed policy moved the S&P 500 to challenge its 40-week EMA. The technical failure to rally above this resistance level, coupled with the Fed’s newly found restraint, portend tough times ahead for equities and the oil market.

“Subscribers to Rick’s Picks should stay tuned to new downward targets for the S&P 500, oil, and possibly gold. Rick’s targets have been spot-on and his well-known pessimism is now reinforced by the failure of Federal Reserve Money Policy to positively affect the overall economy.”

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