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

Stocks in this article: SPY

Broadly speaking then, the M2 level is the relevant metric here. We can see in the latest report for the second quarter using the broadest average available on the spreadsheet, absolute M2 has gone up $80 billion. That's an increase of 0.7% for the quarter.

Since then, the S&P 500 measured by the SPDR S&P 500 ETF Trust (SPY), an exchange-traded fund, has increased just over 7%, or about 10 times the relative increase in money supply. Considering reserve requirements for banks with over $89 million in deposits is 10%, the 10 times relative increase in the S&P over the money supply makes a bit of sense.

A word of caution, though: There is not, nor will there ever be, an exact 10 times correlation between an increase in money supply and an increase in the S&P for any given quarter.

Money can come always come in from other directions and can be used to consume or spend elsewhere besides the market, and the market can always go down despite an increasing money supply.

There is no tracking individual human action with certainty. All this tells you is that the current market level is probably rather close to maxing out the amount of available money, and reserves available to bid up stock prices are more likely than not wearing pretty thin.

What this means is, ultimately, if money supply does not start to increase much quicker and very soon, say during the next three weeks, then someone is going to hit a sell order and there won't be enough loose money available to meet that market order at current stock prices.

Regardless of fundamentals, technicals or anything else, stock prices will likely trend down from here. The money just isn't there to support the market at current levels.

4 Stocks Warren Buffett Is Selling in 2014

At the time of publication, the author was short SPY.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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