Stock Fundamentals -- Primary Indicators

An "easy money", high return / low risk buy signal for this cycle was first flashed during 12/08.
That signal remains in effect. By post WW2 standards, the signal is past due to end with a
reversal of the indicator readings.

But, this has been a near depression environment, and monetary policy has been super easy,
much as it was during the post 1932 period, when the economy began to recover from the Great
Depression and the Fed pegged short rates at nominal levels and allowed the monetary base to
expand rapidly for a lengthy period of time.

During post depression periods, private sector credit demand either shrinks in the early going
or grows negligibly. This leaves money and cash equivalent as the primary source of liquidity.
Thus it has been that investors have been so sensitive to the quantitative easing tactics of the
Fed. During this cycle, the Fed has twiced reversed QE: May - Aug. 2009 and May - Nov.,
2010. The stock market struggled during both of these periods, and needed assurance from the
Fed that  QE would be resumed before it could recover the primary uptrend.

The market has struggled here in 2011 following the Fed's clear intimations that QE2 would
end on 6/30/11. Thus it is that the "easy money" buy signal has not assured a low risk
environment this time out, as the generation of incremental monetary liquidity has been
critical both to the real economy as well  as the stock market.

The private sector credit markets have been thawing out but at a very slow pace in the
aggregate. So, we can only observe how well the economy will hold up in the months straight
ahead in the absence of a strong flow of monetary liquidity. Consequently, I would have to
say that the primary buy signal may not imply continuation of a high return / low risk
environment, and may not function as well as it customarily does. I do not draw a negative
conclusion here. I admit to wariness as I am stuck wanting to see how well the economy
performs and whether there is indeed some bounce back potential after a slow first half of
the year.

Monetary base historical chart.