There Are Only 2 Charts That Matter Right Now…

If you read my commentary every week, then you know that I usually focus on a short-term outlook. That means I will change my mind as the facts change.

I believe this is the most important characteristic of successful analysts.

CNBC analyst Jim Cramer shares this philosophy. As CNBC explains, “The late, great economist John Maynard Keynes always said, ‘When the facts change, I change my mind.’” Cramer has adopted the quote as his personal mantra.

After all, he said one of the easiest mistakes to make is refusing to change your mind when the facts are in and you’ve been proven wrong. It’s one of the most difficult things for most investors and traders to do, but it’s also one of the most important. At least, it is if you want to be a good investor.

“Swallowing your pride is never easy, but the more time you spend digging in your heels, the less you have to take advantage of the new situation and profit from it,” Cramer explained.

Now, I will admit it’s easier for me to change my mind since I have a short-term outlook on the markets. In the short run, I’ve become relatively optimistic about the stock market because the Federal Reserve is relatively pessimistic about the long run.

In recent Congressional testimony, Federal Reserve Chairman Jerome Powell said, “Output and employment remain far below their pre-pandemic levels. The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in containing the virus.”

But the Fed is not simply waiting for a vaccine. Powell noted that the Fed is doing all it can to support the recovery. “In March, we lowered our policy interest rate to near zero, and we expect to maintain interest rates at this level until we are confident that the economy has weathered recent events and is on track to achieve our maximum-employment and price-stability goals,” he said.

Two Charts I’m Watching Closely

Like Keynes, Cramer, and me, Powell is willing to adapt as the facts change. “We will closely monitor developments and are prepared to adjust our plans as appropriate to support our goals.”

This all tells me that investors should watch two charts. First is a chart showing how well we are doing at containing the virus. Here, the data shows we are not doing very well. New cases continue reaching new highs, and many states are re-imposing restrictions.

Source: NY Times

The next chart we need to follow is one showing how well the Fed is adapting to the facts.

The Fed is reacting to this unprecedented crisis with an unprecedented response. The chart below shows the year-over-year change in M1, a measure of money supply.

Source: Federal Reserve

M1 is a narrow measure of money supply. It includes only funds that are readily accessible for spending, like currency in circulation and balances in checking and savings accounts.

There are broader measures of money supply, but I selected M1 because the other money supply indicators follow this same trend, and this one has the longest history.

What This Means

Powell is telling us that the Fed realizes its policy response is critical, and the data tells us that the Fed is taking action to back up its words.

Fed policy might be the only factor that explains why stocks could rally at a time like this. All of the money the Fed creates has to end up somewhere.

Historically, that cash has flowed to large projects or it created inflation. Businesses are not investing in new operations, and local governments have cut back on infrastructure spending. We aren’t seeing inflation in goods and services because consumers are also cutting back. That means much of the cash the Fed creates could be flowing into stocks, which would explains why stock prices are rising.

Price gains in the stock market could continue. From a technical perspective, last week, the SPDR S&P 500 ETF (NYSE: SPY) broke through important resistance, marked with the lower dashed line in the chart below.

Now, prices are positioned to rally toward new highs. The higher dashed line in the chart should act like a magnet for prices. I expect a move toward that line this week.

Action To Take

About a quarter of the companies in the S&P 500 will report earnings over the next week. Traders should be buying the news, and we should see new highs in the S&P 500 before the end of July. If we don’t, that will represent a change in the information we have… and I will adapt my outlook to reflect that fact.

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