We have a new black box.

The Composite Liquidity Indicator edged to a new high this week, just barely above the range of the past 6 months. Even with that 6 month pause, the trend is in much the same longer term path it has been on since 2012. It still has a small margin above its 39 week moving average, and is more than double that spread above its 28 week moving average.Perhaps the most amazing visual is the degree to which the S&P 500 correlates with this line. Strikingly, each time since 2013 that the SPX has dropped to the 39 week moving average of macro-liquidity, the decline has reversed. Since 2012, each time the SPX has hit the Macroliquidity line, the rally has stalled. Pure coincidence, or are we on to something?

Macro-liquidity Composite – Click to enlarge

Since 2012 the ratio of the Macro-liquidity Composite to the S&P 500 has ranged from approximately 1150 to 1250. When that range has been exceeded, it was either a short term buy when the ratio was at or above 1250 or a short term sell when it was around 1150.  I have created a chart to illustrate this. Even though I do not know why the correlation has been as strong as it has been, in theory it should work, and in practice it has been working. As long as it continues to, I’ll keep it as another arrow in the quiver. I don’t expect it to be a magic bullet or permanent black box. It might stop working tomorrow, but for now, it is at least interesting.

Macro-liquidity Ratio- Click to enlarge

Click to view chart.