This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Follow the Money (Supply): Why Stocks Are Headed for Trouble

Stocks in this article: SPY

NEW YORK (TheStreet) -- Before fundamentals, technicals, interest rates, sentiment or anything else, the bottom line of why stock prices go up or down is money supply.

If money is available, one of the places it can go is the stock market. That is a necessary but not sufficient condition for the market to rise. But if not enough loose money is available, all the fundamentals and technicals in the world won't matter. The market has to go down.

Mixed Signals Abound: Tough Decisions: Jim Cramer’s Best Blogs

That is why the most important statistics to follow with regard to market trends is money supply. There are several measures for this, but the most prominent are the M1 and M2 numbers published by the Federal Reserve every week.

M1 consists of physical money in circulation and demand deposits, which are deposits that can be withdrawn without prior notice. M2 consists of M1 plus savings deposits, time deposits below $100,000 and money-market balances.

If we consider the kind of money that enters the market to bid up stock prices, M2 is a more accurate measure of what can bid up a security on demand than M1 is.

Money-market funds can be liquidated and used to invest almost immediately except in times of market stress. The only minor exception is time deposits, which can be liquidated and then invested only at certain times, but below $100,000, and that time frame is usually rather short.

What is not directly relevant to M1 or M2 is the monetary base, which is what is directly affected by quantitative easing, the Fed's bond-buying program.

When the Fed buys bonds, the money it buys bonds with goes directly to the monetary base via some bank which holds the money. It doesn't necessarily go into the money supply.

A bank can decide to simply do nothing with the money and keep it at the Fed, storing it as excess reserves outside the economy. Money stored as excess reserves cannot be used to bid up stock prices, or any other prices for that matter, until those excess reserves are loaned. They then become part of M1 or M2.

Jobs Report Allows Fed to Focus on Employment Instead of Inflation

1 of 2

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs