This Day On The Street
Continue to site
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

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

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M1 consists of physical money in circulation and demand deposits, which are deposits that can be withdrawn without prior notice.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

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

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
Stocks Under $10

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

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
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
SPY $206.33 0.00%
AAPL $93.74 0.00%
FB $117.58 0.00%
GOOG $693.01 0.00%
TSLA $240.76 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs