By Nigam Arora
BRENDAN SMIALOWSKI/AFP/Getty Images)
In a bid to support its stock market amid the coronavirus outbreak, China has cut reverse repo rates and injected massive liquidity. None of this helped the Chinese stock market from a rout. However, it has buoyed the stock market in the U.S.
There are expectations that China will inject even more money into the financial system. If that is not enough, there is speculation of more money printing by central banks across the world. There is even talk of an interest-rate cut by the U.S. Federal Reserve.
Can money printing reverse the economic damage from the coronavirus? Can money printing continue to take stocks to new highs? Let’s explore with the help of two charts.
Please click here for a chart showing the Federal Reserve’s assets.
Please click here for an annotated chart of the Dow Jones Industrial Average ETF /zigman2/quotes/208954582/composite DIA -1.57% , which tracks the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -1.69% .
For the sake of transparency, both charts were previously published and nothing has been changed since publication.
Note the following:
• The first chart shows a dramatic rise in the Federal Reserve’s assets since last year.
• Since the Fed started printing more money, the U.S. stock market has risen in lockstep with the Fed’s balance sheet.
• The conclusion is unmistakable that the money the Fed is printing is going into stocks, especially in large-cap stocks such as Apple /zigman2/quotes/202934861/composite AAPL -1.44% , Amazon /zigman2/quotes/210331248/composite AMZN -0.64% and Microsoft /zigman2/quotes/207732364/composite MSFT -0.92% .
• The second chart shows the support zone in the stock market.
• The second chart shows relative strength index (RSI) divergence. In plain English, this means that the internal momentum of the stock market was declining while prices were going up. Such a development often is a precursor to a decline in the stock market.
• The second chart shows the Arora signal to raise cash and hedges to protect up to 63% of long-term portfolios given prior to the recent drop in the stock market.